Bulls back in charge

January 16, 2014 — Mitul Kotecha

Today I’m posting from Seoul after traveling to Singapore, Cambodia, and Beijing as part of our Asia roadshow presentations. Tomorrow I’m in Taipei and next week Mumbai.

Unfortunately as is usual with such trips all I’m seeing are airports and hotels as I move from meeting to meeting. On the other hand it’s great to get a perspective about what investors are thinking at the start of the year.

Investors seem to be still making their minds about whether the economic news is good or bad. The bad news from the disappointing US jobs report last week has quickly been overtaken by better news from core US retail sales, Empire Manufacturing confidence and earnings. The net result is that bulls are back in charge.

Consequently the dollar also looks to be in good shape. Given that the remaining US data releases this week in the US are likely to remain upbeat I see no reason to alter my positive stance on the US dollar.

Clearly it’s still early days for US Q4 earnings releases suggesting that sentiment will remain fickle over coming days but any slippage in the USD should be seen as buying opportunities.

Posted in Economics. Leave a Comment »

Shaky start to the year for equities

January 14, 2014 — Mitul Kotecha

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.

Posted in Federal Reserve. Tags: , , , , . Leave a Comment »

US dollar pull back to prove short lived

January 13, 2014 — Mitul Kotecha

Having spent the tail end of last week in Singapore and Phnom Penh presenting the Global outlook for 2014 to clients as part of our Asian roadshow it struck me that there is a strong consensus view about a number of market movements this year. In particular, most expect the USD to strengthen over 2014. Indeed just as it looked as though the USD was going to surge into the new year, along comes the US jobs report to spoil the party. Clearly, it’s not going to be a one way bet in 2014.

The surprisingly weak US December payrolls data in which only 74k jobs were added compared to consensus expectations of close to 200k helped to support expectations that Fed tapering would take place only gradually, lending a helping hand to risk assets at the turn of this week.

I don’t believe the jobs data materially changes the picture for the Fed. Adverse weather may have played a role in the weakness in jobs while complicating matters was the drop in the unemployment rate to 6.7% largely due to around 350,000 people leaving the labour force. The data resulted in a drop in US bond yields and a weaker USD although equity market reaction was more mixed. Meanwhile gold and other commodity prices rose.

While risk assets may find some support in the wake of the jobs report this week much of the US data slate will if anything highlight that economic growth is strengthening, suggesting a reversal of some of the price action in US Treasuries, USD and gold. Data releases include a likely healthy increase in core US retail sales in December together with gains in manufacturing confidence surveys (Empire and Philly Fed) and industrial output as well as a further increase in consumer confidence (Michigan sentiment survey).

Additionally several Fed speakers are on tap over coming days, which may give more colour on Fed thinking in the wake of the jobs report. However, it is doubtful that they will indicate that the Fed will not taper as expected in January.

Clearly markets were caught overly long USDs last week as reflected in CFTC IMM speculative positioning data as of 7th January which showed that net USD long positions had reached their highest since September 2013. The pull back in the USD is set to be short lived, however, especially if US data over coming days reveals further improvement as expected.

USD/JPY in particular bore the brunt of the pull back in US yields, as long positions were unwound. A Japanese holiday today may limit activity but much will depend on the propensity for US yields to bounce back, with 10 year US Treasury yields currently around 2.85% compared to around 2.97% on Friday.

Asian currencies have been the most sensitive to US Treasury yields gyrations over the past three months. In order of sensitivity to US 10 year Treasury yields the highest is the JPY, followed by MYR, THB, PHP and SGD. These currencies would be expected to benefit the most in the wake of the drop in yields at the end of last week although as noted any pull back in US yields is likely to prove temporary. While the THB may suffer from political concerns in the near term the other currencies are likely to see some short term gains.

Posted in Asian currencies, Federal Reserve, Japan, Thailand. Tags: , , , , , . Leave a Comment »

Caution continues

January 7, 2014 — Mitul Kotecha

The cautious tone in risk assets was maintained at the turn of this week as equity markets slipped further overnight in the US and recorded mixed performances in Asia. While the rise in risk aversion is unlikely to reflect a major change in market sentiment, it does highlight that risk assets will not repeat the one sided moves recorded in Q4 last year over coming months. US equity valuations for example look far richer compared to historical valuations while earnings expectations are softer, suggesting that equity momentum may not be as robust.

Ahead of the key data and events this week including European Central Bank and Bank of England policy decisions and the US employment report, caution is likely to prevail. Highlights today include flash December Eurozone CPI inflation data, which is likely to show inflation pressures remaining subdued, German December employment data and the US November trade balance.

Disappointing US non manufacturing confidence data released yesterday (53.0 for the ISM non manufacturing survey against expectations of 54.7) has taken the wind out of the USD’s sails although most major currencies look set to gyrate in relatively tight ranges over the near term. JPY will find some support from a generally softer risk tone that has filtered through markets and may struggle to retake the 105 level.

Meanwhile EUR/USD has failed to hold onto recent gains, with sentiment turning less positive as indicated by the latest CFTC IMM data on speculative positioning. Likely soft Eurozone inflation data to be released today will likely undermine the currency further. However, given that it is unlikely that the ECB will sound any more dovish at this Thursday’s policy meeting the downside for the EUR is set to be limited, with technical support around 1.3525.

Posted in Bank of England, ECB. Tags: , , , . Leave a Comment »

USD/JPY pulls back, AUD range bound

January 3, 2014 — Mitul Kotecha

USD/JPY pulled back sharply overnight dropping swiftly below 105 as weaker global equities / higher risk aversion together with a pull back in US yields weighed on the currency pair. Nonetheless, its pull back is set to prove temporary and if anything provides better levels to initiate long positions. A Japanese holiday today will limit the scope for much movement in the currency.

Japan clearly has a lot of policy challenges in the months ahead (consumption tax hike, Prime Minister Abe’s third arrow, and hitting the 2% inflation target) which could prompt some volatility in the JPY but the risks remain skewed for more downside in the currency, especially given the potential for more aggressive BoJ policy action and of course the likelihood that the real yield differential between the US and Japan widens further.

AUD was undermined somewhat by the release of weaker than expected Chinese manufacturing and non manufacturing confidence data and softer commodity prices but overall the currency looks like it has found a new range around 0.8820- 0.8980 against the USD over the short term. This relative stability even in the wake of disappointing news in China marks a major shift compared to the selling pressure registered over much of Nov/Dec 13.

I am more constructive on AUD going forward and expect much more limited downside potential in the week ahead. Direction next week will come from trade data, building approvals and retail sales, but movement ahead of this will be limited.

Posted in Australia, FX, Japan. Tags: , , . Leave a Comment »
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