Finally back in the office after two weeks of traveling and it appear that the upside momentum for equity markets has definitely waned. Concerns about the pace of growth, earnings and valuations finally appear to have caught up with stocks. Meanwhile US Treasury yields have remained under downward pressure since the release of the disappointing US December jobs report despite some encouraging data since. In Asia China’s GDP release for Q4 reveaked some loss of momentum, with growth decelerating to 1.8% QoQ. Nonetheless, the annual pace of growth looked reasonably healthy at 7.7%, suggesting a limited reaction in markets today.
A US holiday today will likely keep a cap on market activity today but there will be plenty of Q4 earnings reports over coming days to give further direction. In terms of policy decisions the Bank of Japan and Bank of Canada will likely keep policy unchanged following their policy decisions this week. The BoC is faced with inflation well below target while the BoJ continues to battle to push inflation towards its 2% target. Both central banks will maintain easy policy.
On the data front there is very little of note in the US to focus on, with the main release the December existing home sales report on Thursday where a rebound of 1% is expected. European data releases may prove to be more interesting, with the release of flash purchasing managers indices on tap. Further gradual gains are likely to be registered in January although there will be attention on France which has lagged other countries.
Ratings decisions by Moody’s and Fitch on Germany and France, respectively, will also garner some attention. Rumours of a German downgrade are likely to prove unfounded. In the UK the Bank of England MPC minutes will be is likely to reveal an unchanged outcome of voting to keep policy unchanged although the BoE is likely to adjust its guidance soon reflecting the quicker than anticipated fall in the unemployment rate.
The USD looks well placed to extend last week’s gains, especially against the EUR, with a drop below 1.3500 on the cards. Disinflation pressures and relatively soft growth highlight the potential for easier monetary policy. A variety of options for the ECB are on the cards but the EUR will struggle to make headway given expectations of more ECB action. Additionally the EUR appears to be benefiting less from reserves recycling flows, especially given that Asian central bank reserves accumulation has likely to have slowed. The deterioration in speculative positioning reflects the deterioration in sentiment for the currency.
In contrast USD/JPY will struggle too push higher given the drop in US Treasury yields. Additionally weaker Japanese stocks will not help given the correlation between the Nikkei and JPY. The Bank of Japan meeting this week will not give much support for a further move higher in USD/JPY given expectations of an unchanged outcome. Some consolidation around 104.00 is likely over the short term, with upside limited to technical resistance around 104.92.
I fly off to Mumbai tonight for the last leg of our Asia roadshow presentation series. Hopefully my next post can shed some light on the recent stability of the Indian rupee.