Euro Has That Sinking Feeling

June 7, 2010 — Mitul Kotecha

The reaction to the US May jobs report shows that markets are particularly susceptible to negative US news at a time when growth fragilities in Europe are becoming increasingly apparent. Coupled with worries about Hungary, risk aversion has jumped.

Unsurprisingly the EUR took the brunt of pressure. Rhetoric over the weekend may help to assuage some fears but I suspect it is too late now that the cat is out of the bag. Hungary’s government maintained that it will meet this year’s budget deficit target of 3.8% of GDP. European Union officials also attempted to calm market concerns, downplaying any comparison of Hungary to Greece.

The overall EUR/USD downtrend remains intact. Renewed doubts about German participation in the EU/IMF rescue package, with the German constitutional court potentially blocking its contribution, will add to pressure as well as a UK press report titled EUR ‘will be dead in five years’ . The January 1999 EUR/USD introduction level around 1.1830 has now moved squarely into sight.

It is unlikely that data and events this week will do much to reverse the market’s bearish tone. Highlights include the ECB, BoE and RBNZ meetings in Europe, UK and New Zealand, respectively. The ECB (Thursday) is highly unlikely to shift its monetary policy stance. Given some opposition to bond purchases from within the ECB council the comments in the accompanying statement will be closely monitored. The BoE will also leave policy unchanged on the same day but the RBNZ is set to begin its hiking cycle with a 25bps move.

On the data front the US slate includes the Fed’s Beige Book, April trade data, May retail sales and June Michigan confidence. The Beige Book is likely to reveal some improvement in activity with little sign of inflation, whilst the trade deficit is set to widen further due to a higher oil import bill. Retail sales will reveal an autos led increase in the headline reading but more subdued core sales, whilst consumer confidence is set to rise for a second straight month.

There will be more attention on rhetoric from EU officials rather than eurozone data, with the Eurogroup of Finance Minister’s and Ecofin meetings garnering more interest. In Japan, politics will take centre stage, with the new cabinet line up in focus following the confirmation of Naoto Kan as Prime Minister. Comments by the new PM himself will be of interest, especially with regard to combating deflation and in particular any elaboration on his penchant for a weaker JPY.

All-in-all, the week is unlikely to see a let up in pressure on risk trades and will start much as the last week ended. Although the market’s attention is on the EUR, it should be noted that the AUD has lost even more ground so far this month although the EUR remains the biggest loser in terms of major currencies so far this year (vs USD). In the case of the AUD the move reflects a massive unwinding of long positioning (as reflected in the latest CFTC IMM data which shows that speculative AUD positioning has dropped to its lowest since March 2009).

In contrast in the case of the EUR where positioning is already very negative, the move simply reflects deteriorating fundamentals. The fact that European officials are showing little concern about the decline in the EUR (why should they given that the currency is now trading around fair value) and in some cases encouraging it, suggests that there is little to stop EUR/USD from dropping much further and parity is looming a lot closer.

Posted in Australia, central banks, Currencies, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, Greece, Hungary, IMF, Interest rates, Japan, Monetary Policy, Politics, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

What A Disappointment!

June 5, 2010 — Mitul Kotecha

Ok so after talking up US data releases over recent weeks the big one namely the May jobs report, came as a disappointment. To recap, payrolls rose 431k, which was less than market consensus. Hiring due to the census which by its nature will be transitory was however, in line with expectations, at 411k, leaving ex-census hiring at a measly +20k.

Believe it or not, the trend in payrolls is one of improvement but the May outcome came as a blow to a market with bullish expectations, especially following earlier comments from the US administration hinting at a robust outcome. The disappointment was compounded by talk of a +700k payrolls outcome, which proved widely off the mark. The unemployment rate did drop more than expected, by two ticks to 9.7%, but this was due to disaffected workers dropping out of the labor force rather than an inherent pick up in job conditions.

Combined with worries about a new target in the sovereign debt crisis in Europe, this time Hungary, markets quickly tanked and risk aversion jumped. So much for relative stability! The concerns were sparked by Hungarian officials themselves, with a spokesman for the Prime Minister warning about the fiscal mess inherited from the previous government. The real blow came when the spokesman compared Hungary to Greece and reportedly said that talk of a default was “not an exaggeration”.

Suffice to say, markets are set up for tense and nervous week in which risk trades are set to suffer further. EUR/USD once again proved to be the weak link dropping below the psychologically important level of 1.20 and the EUR introduction rate around 1.1830 has moved sharply into focus.

Posted in Currencies, Economics, Economy, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Greece, US, US administration. Tags: , , , , , , . 1 Comment »

Wait And See

June 4, 2010 — Mitul Kotecha

It’s difficult to be too conclusive in my blog post today given that markets are in waiting mode for a number of events to pass. First and foremost is the US May jobs report. The consensus forecast is for a gain of 536k in nonfarm payrolls and a slight drop in the unemployment rate to 9.8%. Payrolls estimates range from a high of 750k to a low of 220k, the wide margin likely reflecting the uncertainty of the amount of census hiring.

On the face of it a 500k+ gain in payrolls looks strong, but the bulk of this, probably about three-quarters, will made up of census hiring which by its nature is transitory. Therefore, only about 100k in payrolls will be due to private sector jobs growth, which is still not bad. Most of the clues leading up to the jobs data are consistent with the consensus, including the 55k increase in the May ADP.

The second event is the change in Prime Minister in Japan. Naoto Kan, the previous Finance Minister is set to take over the helm. His job is going to tough, with all eyes on how and when the government begins to get to grips with Japan’s burgeoning debt burden which is approaching 200% of GDP. Most of this, around 96% is held by domestic investors, so Japan is less exposed to foreign investor sentiment.

Nonetheless, even domestic investors including many large life insurance companies are increasing their overseas investments at the expense of Japanese debt. Kan is also a supporter of weaker JPY so at the least the rhetoric from Japanese officials to weaken the JPY will step up, especially given the very painful move in EUR/JPY over recent months.

Finally, the G20 meeting beginning today in South Korea will garner attention. Topics will include bank regulation and capital requirements, the European debt crisis, and policy tools such as the recent suggestion by South Korea to make permanent the currency swap agreements between central banks. Aside from a commitment to keep policy supportive, and likely talking up the efforts to combat the crisis in Europe, it is difficult to see anything particularly market moving emerge from the meeting.

Posted in central banks, Currencies, Economics, Economy, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Interest rates, Japan, Politics, South Korea, US. Tags: , , , , , , , , , , , , . 1 Comment »

Renewed concerns

June 2, 2010 — Mitul Kotecha

Despite some positive US data, with both the May ISM manufacturing index and April construction spending coming in stronger than forecast, market sentiment soured. The relative calm that was exhibited at the end of May is giving way to renewed fears as equity markets weaken, volatility increases and risk aversion intensifies. Risk trades are set to remain on the back foot, with the EUR likely to remain the weakest link. After testing support close to 1.2110 EUR/USD bounced but remains vulnerable to a fresh test of this level in the short-term.

A combination of concerns including rumours of ratings downgrades, with France the new target, Middle East tensions, weaker Chinese manufacturing activity and worries about increasing bank writedowns in Europe, have conspired to drag markets lower. The failure to stem the hue oil-leak in the US contributed to the malaise as the US government announced a criminal probe.

For the most part, data releases were unhelpful to risk appetite as the majority of global purchasing managers indices (PMIs) slipped in May, led by China. Only a few increased, including India and notably Ireland, whilst the Spanish and Greek PMIs fell. Although the US ISM index slipped the components looked positive, especially the employment component which moved higher, suggesting some upside potential for Friday’s May payrolls data for which we look for a 500k increase.

A picture of divergence appears to be growing in the eurozone, which will act as another source of pressure on the EUR. Germany’s outperformance is widening as reflected by the fact the German unemployment dropped to 7.7% in May in contrast to a rise in eurozone unemployment, to 10.1%. Moreover, Germany was the only country where its PMI was actually revised higher relative to the flash reading. There are also growing divisions within the European Central Bank (ECB), in particular towards the purchase of government bonds, with German ECB members particularly critical.

Posted in central banks, China, Currencies, Economics, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Germany, Greece, India, Monetary Policy, Spain, US. Tags: , , , , , , , , , , , , , , . Leave a Comment »

Volatility Within Ranges

May 31, 2010 — Mitul Kotecha

Most investors will likely be happy to see the tail end of May given the sharp losses in many asset classes over the month. At least over the last few days there was a sense of some healing, particularly in risk assets though it is questionable how long this can continue given the still many and varied uncertainties afflicting markets. A reminder of this came late on Friday, with Fitch downgrading Spain’s sovereign credit ratings despite the passage of austerity measures.

The Fitch decision highlights that Spain is rapidly becoming the new epicenter of the crisis; focus on the savings banks or Cajas is intensifying ahead of the June 30 deadline for mergers to qualify for government money, the minority government’s popularity is in further decline, whilst unions are threatening more strikes across the country. Unions in Greece and Italy are also pushing for coordinated strikes, highlighting the difficulties in pushing through austerity measures.

At least economic data is providing some solace to markets. Releases last week in the US highlighted the fact that consensus expectations are underestimating the pace of recovery; consumer confidence, durable goods orders and new home sales all came in above expectations. The same story is likely this week, but there is really only one piece of data that attention will focus on and that’s the May jobs report. The consensus is for a strong 508k increase in non-farm payrolls following a 290k increase in April, though around three-quarters of this will be related to census hiring. The unemployment rate is likely to dip slightly to 9.8%.

Markets are likely to be in limbo, with volatility in ranges likely this week. USD sentiment remains strong as reflected in the CFTC IMM data where net aggregate positioning is at an all time high, but further USD gains may be harder to come by ahead of the US jobs report and G20 meeting this weekend. Stretched USD positioning has proven no barrier to USD strength over recent weeks but the fact that markets are very long USDs could at the least result in a slower pace of further appreciation.

EUR speculative sentiment remains close to all time lows although there are signs of some relative stability over recent weeks. EUR/USD is likely to range between 1.2134 and 1.2475 this week. There was a sharp drop in net short JPY positions over the week (ie short-covering) though this appears at odds with the fall in the JPY. GBP speculative positions showed little improvement, languishing close to all time lows, whilst net longs in commodity currencies were pared back sharply, especially in AUD where net longs were cut by around half though sharp declines in positioning were also registered for NZD and CAD.

GBP could suffer due to worries about the UK government’s plans to reduce its burgeoning budget deficit following the resignation of Treasury Minister David Laws, following an expense scandal. The resignation hits the coalition just three weeks before the emergency budget and could result in complications on the negotiations between the Liberal Democrats and Conservatives on the substance of the deficit cutting measures. GBP/USD is likely to find support around 1.4260 and resistance around 1.4612 this week.

Posted in Australia, Commodities, Currencies, Economics, Economy, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Greece, Spain, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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