Awaiting Yellen

February 11, 2014 — Mitul Kotecha

There was very little activity of note overnight, with markets taking on the appearance of grounding to a halt ahead of the first semi-annual testimony to Congress by new Fed Chairman Yellen later tonight. A Japanese holiday today will act as another dampener on activity.

Weaker data and/or emerging market tensions are highly unlikely to deter Yellen and the Fed from maintaining a tapering path but of interest to markets will be any indication that the unemployment rate is to be deemphasized given its misleading fall over recent months. With little else of note on tap until the release of US retail sales and Eurozone Q4 2013 GDP later in the week Yellen’s speech will set the tone for markets over coming days.

The biggest market movers over recent days have been the VIX index, natural gas and gold prices. The VIX has fallen sharply reflecting a major turnaround in risk appetite from an elevated level, which has been corroborated by our risk barometer moving back into risk ‘neutral’ territory from risk ‘hating’.

Nonetheless, although emerging market fears have calmed down the path ahead is still likely to be a volatile one. Natural gas prices have also dropped reflecting expectations of milder weather ahead in the US. In contrast gold prices have rallied further extending gains this year to around 6%. Lower US yields and a weaker USD have helped to buoy gold prices over recent days while news of record gold demand and supply from China has also helped.

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Emerging market currencies under pressure

January 24, 2014 — Mitul Kotecha

One of the key factors that have provoked the current bout higher risk aversion was the sub-50 Chinese manufacturing confidence gauge (PMI) which has intensified concerns about slowing growth . Additionally reports regulators in China have issued warnings about credit to the coal industry has reinforced debt fears in the country.

Domestic fundamental and political pressures in other currencies have contributed to the malaise in emerging markets, with a major drop in the Argentine peso and pressure on many other high beta emerging market currencies (including the usual suspects Turkish lira, South African rand and Indian rupee).

A deteriorating outlook for many emerging markets currencies based on concerns about the impact of Fed tapering and slowing emerging markets growth appears to be increasingly intensifying. Competition for capital as the Fed tapers will make things worse. The pressure is unlikely to ease quickly leaving many EM currencies vulnerable to a further sell off.

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USD firm versus EUR but not against JPY

January 20, 2014 — Mitul Kotecha

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.

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On track for a positive end to the year

December 23, 2013 — Mitul Kotecha

A solid revision higher to US Q3 GDP at the end of last week sets up a positive tone for risk assets into year end even as they digest the imminent onset of Fed tapering. The data revealed a revision higher to a 4.1% QoQ annualised pace of growth and if anything lent credence to the Fed’s decision to begin tapering. The GDP data will be followed by a series of positive data releases in the US this week including November personal income and spending and a likely upward revision to December Michigan consumer confidence both on tap today.

Tomorrow, November durable goods orders and next week December Conference Board consumer confidence will also paint a picture of broadening improvement in economic conditions, providing further validation to Fed tapering. Against this background US yields should be well supported along with the USD. Into next year US economic outperformance will continue, leading to both higher US yields and a firmer USD.

A Japanese holiday (Emperor’s birthday) today will dampen market action although Japanese data releases over the rest of the week will highlight further progress on the economic front, with November inflation pushing higher and industrial output expanding at a healthy clip. USD/JPY retained a foot hold above 104 but the large extent of short JPY positioning highlights scope for profit taking. Even so, the rise in US Treasury yields suggest limited downside risks for USD/JPY.

There is on little on tap on the data front in the Eurozone allowing markets to digest the steps towards banking union announced last week. Consequently EUR/USD is set to remain rangebound around 1.3650-1.3750.

There may be more interest in events in China as money market conditions and confidence surveys garner interest. Tight money market conditions will weigh on regional sentiment. A likely decline in both the manufacturing and service sector purchasing managers’ indices will also act to dampen Asian currencies reinforcing the pressure already in place from a broadly stronger USD. News in Thailand that the opposition Democratic Party has decided to boycott the Feb 2 elections will add to political uncertainty and pile more pressure on the THB although the regional underperform remain the IDR.

Overall, a thinning in market conditions as both liquidity and market participants disappear for the holidays imply limited activity over coming days. The fact is that the end of the year will market a solid year for equities and a poorer year for bonds but at least the debate over Fed tapering timing has finally been put to the rest. More of the same is likely next year but notably the growth gap between developed and developing economies will narrow, which at a time of heightened competition for capital amid Fed tapering, suggests that capital flows will increasingly be steered towards developed economies.

Dear readers, this is my last post for 2013. Thank you for taking the time to read my blog posts. I wish all Econometer readers happy holidays, success, prosperity and good health in the year ahead.

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US dollar languishing at multi month lows

October 21, 2013 — Mitul Kotecha

Following the resolution to the uncertainty and stress surrounding the political conflict on raising the US debt ceiling and thereby avoiding a US debt default markets will likely take a more upbeat tone this week extending last week’s rally in risk assets. We will also be able to scrutinise delayed US data releases, in particular the US September employment report which will be released tomorrow and possibly September US retail sales this week.

These and other US data may however, take some of the shine off buoyant equity markets given that they are unlikely to be particularly impressive. Indeed, clues will now be sought to determine exactly what impact the government shutdown and protracted political friction will have had on the economy but the news may not be particularly good in terms of US recovery hopes.

On the plus side and as reflected by the bull flattening in US interest rate markets, markets appear to be pushing back expectations of Fed tapering especially as US politicians will likely gear up for another fight over coming months when the debt ceiling / budget will need renewed agreement.

Fed tapering by December now looks highly unlikely unless the US delivers a series of very positive data surprises. The net impact on the USD is clearly a negative one, with the currency continuing to languish at multi month lows and showing little sign of turning around over the near term.

Elsewhere, in Europe the data will be a little more encouraging, with the ‘flash’ purchasing managers’ indices and the Germany IFO business confidence survey expected to show further improvement while in the UK a healthy reading for Q3 GDP is likely to add to the view that further Bank of England asset purchases are moving off the table. The EUR will likely benefit from the weakness in the USD and relatively better data releases although the sharp increase in EUR positioning suggests that further upside momentum may slow.

Asian currencies will continue to benefit from a double dose of good news from the US debt ceiling agreement as well as a run of positive Chinese releases over recent weeks. This is set to continue this week, with solid Chinese purchasing managers indices (PMI) data expected on Thursday and firm Q3 Korean GDP data on Friday. Meanwhile the central bank BSP in the Philippines is likely to keep policy on hold this week given the well behaved inflation backdrop.

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