Equity markets and risk assets in general are having a decidedly shaky start to the year. Following a 30% increase in the US S&P 500 last year markets are finally looking at whether earnings expectations and economic growth will justify further gains in equities.
Worries ahead of Q4 earnings releases and perhaps concerns about the economy in the wake of the disappointing US December jobs report weighed on US equities overnight. These concerns also fuelled a further drop in US Treasury yields and undermined the USD. In contrast gold prices were buoyed.
The sharp drop in Treasury yields over recent days highlights both the previous extent of bearishness in bonds but also some hope / expectation that the Fed may slow the pace of tapering in the wake of the jobs data. This seems unlikely however, and as indicated by the Fed’s Lockhart overnight the data is highly unlikely to alter Fed policy.
Q4 earnings releases from JP Morgan and Wells Fargo as well as speeches by Dallas Fed President Fisher and Philly Fed President Plosser will be in focus today to provide further direction to markets. On the data front US December retail sales is the main release of note for which a drop in headline sales will be more than compensated by a gain in sales ex autos.
Overall a cautious tone is likely to continue until further clarity on the earnings outlook is revealed but economic data at least should look more encouraging over coming days. Clearly lower US Treasury yields are weighing on the USD but this is likely to prove to be a correction rather than a sustained USD decline.
It is interesting that the EUR has not managed to capitalize on the weakness in the USD. Lingering expectations that the European Central Bank may need to become more aggressive in terms of policy in the wake of soft inflation could be restraining the EUR. A solid reading for November Eurozone industrial production expected to be revealed today is unlikely to help the currency.
GBP was a major loser overnight although there does not seem to be much of a fundamental reason to sell the currency aside from soft November industrial production data released at the end of last week. Perhaps some profit taking on long GBP positioning may be attributable for the drop in the currency but the CFTC IMM data shows that speculative positioning was not overly long. Inflation data today will provide further direction, with GBP likely to remain under short term pressure.