Equities weaker, US yields lower, USD softer

The US Federal Reserve’s rejection of capital raising plans by several banks taken together with further confrontation between the US and Russia and a disappointing US durable goods orders report were sufficient to result in a sell off in equity markets, lower US yields and a weaker USD.

Gold failed to benefit in yet a further sign that its bull run has ended, with the metal honing in on its 200 day moving average at 1296.71. On the US data front headline February US durable goods orders beat expectations (2.2%) but core orders (-1.3%) were weaker than expected.

Although the lead for Asia is a weak one markets may still find some resilience due to expectations of policy stimulus from China. Similarly dovish talk from the European Central Bank will offer further support to market sentiment while undermining the EUR somewhat. On the data front today the main releases are US Q4 GDP revision (upward revision likely), and UK retail sales (rebound likely).

US dollar to consolidate gains

Markets last week were spooked by comments from Fed Chairman Yellen and the upward drift in Fed Funds projections which appeared to indicate a rate hike would take place around the spring of 2015.

This week will give the chance for Fed officials to either downplay or reinforce Yellen’s comments. There are several Fed speakers on tap over coming days including Stein, Lockhart, Plosser, Bullard, Pianalto and Evans.

Despite Yellen’s comments US equity markets ended the week higher despite Russia’s annexation of Crimea. US bonds yields also firmed over the week while the USD rebounded.

Sentiment this week will depend in part on further Fed commentary as noted above, Chinese data and also whether tensions between the West and Russia intensify. Reports that Russia has built up a “very sizeable” force on its borders with Ukraine do not bode well in this respect.

US data this week will look less weather impacted and will err on the positive side. Consumer confidence is set to be unchanged in March, while February new home sales are set to decline but durable goods orders are set to rise. Q4 GDP is likely to be revised higher and personal income and spending will reveal healthy gains in February.

Overall, the USD is expected to consolidate its recent gains will some improvements on the data front will interest rate markets will remain under pressure.

Risk appetite firms

Despite the decision by Crimea’s parliament to formally request accession to Russia markets risk assets performed well overnight, with US and European equity markets registering solid gains. Consequently US yields rose overnight while the USD made gains against safe haven currencies.

Market relief probably reflected the fact that the referendum itself passed without violence while the reaction by the West in terms of sanctions was not seen to have a particularly detrimental impact on sentiment.

China’s decision to widen its currency band also passed with little fanfare given that such a move was largely anticipated. There will be some positive pass through into the Asian session from the gains in asset markets overnight although a degree of caution continues to be warranted given the still precarious situation in the Ukraine and ongoing tensions between Russia and the West.

No relief for risk assets

Perhaps unsurprisingly given the tumultuous build up to the poll the Crimean referendum resulted in an over 90% vote to leave Ukraine and join Russia according to Russian state media. Risk assets were already under pressure leading into the vote and the news is not going to help sentiment in any way, with the West already denouncing the result and Russia seeing it as a validation of its stance. Further sanctions and other punitive measures are likely to be announced leading to a heightening of tensions and increased risk aversion.

Our risk barometer is already well into “risk hating” territory highlighting the intensifying pressure on risk assets and demand for safe havens. Consequently expect the likes of the CHF, JPY and gold to remain under upward pressure and anything with high beta to be under downward pressure.

There is also plenty of data and events to capture the interest of markets this week, with the Fed FOMC meeting capturing top billing. Unsurprisingly no change in policy is expected, with a USD 10 billion taper set to be announced. Fed Chairman Yellen is set to highlight that the bar remains high to any slowing in the pace of tapering while more qualitative guidance is set to be announced.

On the data front US data will remain weather impacted but nonetheless, February industrial production is set to reveal a small gain today while manufacturing surveys will reveal some improvement in March. Additionally housing starts are set to rebound in February. However, Treasury yields are likely to be capped despite more encouraging data as safe haven demand intensifies, leaving the USD also restrained.

In Europe the data flow is less numerous and what there is will support the view that more action is needed by the European Central Bank (ECB) to ease policy. February CPI inflation is set for a downward revision while the German ZEW investor confidence index will slip further.

US dollar under renewed pressure

After hitting a multi month low at the end of last week the USD (index) failed to extend gains this week dropping overnight to 79.592 overnight in the wake of some slippage in US Treasury yields (10 year treasury yields fell to around 2.73%).

Conversely EUR/USD once again breached the 1.39 level despite attempts by European Central Bank officials to convince the markets that the message from last week’s policy meeting was in fact dovish. Markets have yet to be convinced (as do I), however, given that the ECB has yet to put its words into action in terms of further policy easing.

The key to a more sustainable EUR decline / USD recovery is to shake off the bad weather impact on the US economy. This is likely to take place soon although not quickly enough to be revealed in today’s release of US February US retail sales data, which will reveal that core sales remained pressured, leaving the USD without much support.

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Asian currencies weaken

Asian currencies are facing pressure today in the wake of a generally firmer USD tone although the fact that US Treasury yields continue to edge lower will provide some relief. There has been some good news on the flow front, with the region registering a return of equity portfolio flows so far this month to the tune of USD 1.56 bn, with all countries except Vietnam registering equity inflows. Notably however, India has registered strong outflows of equity capital this week, which could cap gains in the INR.

Weakness in the CNY and CNH has been sustained with the USD grinding higher against both. Recently weaker economic news and expectations of some form of policy measures on the FX front (perhaps band widening) soon after the end of the National People’s Congress will keep the CNY and CNH under pressure.

March’s biggest outperformer the IDR has been an underperformer overnight although its drop has been small compared to the magnitude of recent gains. Nonetheless, USD/IDR may have found a tough level to crack around 11400.

The INR is set to trade with a marginally weaker tone but further direction will come from today’s releases of January industrial production and February CPI inflation data. A move back to 61.50 for USD/INR is likely unless the data comes in strong.

Chinese data casts a shadow over markets

The better than expected reading for January US jobs growth (175k versus 149k consensus) helped to buoy asset markets at the end of the week, with major US equity indices posting gains. The uptick in the US unemployment rate to 6.7% was also not perceived badly as it will put less pressure on the Fed to change its forward guidance. The jobs data helped to overcome concerns over ongoing tensions between the West and Russia over Ukraine.

Consequently the USD strengthened as US yields rose, with the 10 year Treasury yield almost touching 2.82%. The most sensitive currency pair to higher US yields is USD/JPY and further upside traction is likely. The main exception to the USD rebound was the EUR, which continued to benefit from the ECB’s lack of policy easing or dovish commentary at its policy meeting last week.

Chinese data released over the weekend will prove to be less constructive for asset markets at the turn of this week, however, with a surprise trade deficit registered over February and slowing inflation to a 13 month low. Exports dropped by whopping 18.1% in February while imports rose more strongly than expected at 10.1% yielding a trade deficit of USD 22.99 billion.

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