Geopolitical tensions to weigh on risk assets

March 3, 2014 — Mitul Kotecha

There continues to be a disconnection between rising geopolitical risks as tensions between Russia and Ukraine intensify, and the performance of equity markets. US equities ended the week on a high note despite a bigger than expected downward revision to US Q4 GDP and risk sentiment overall remained supported according to our risk barometer. Other data were helpful for markets as February Chicago manufacturing confidence (PMI) and Michigan consumer confidence came in better than expected. The firmer tone to risk assets will not last, with risk aversion set to intensify today.

Markets continue to give US economic data the benefit of the doubt, downplaying the harsh weather impact on economic data. This is set to continue this week, with the release of a plethora of US data including January personal income and spending and February ISM manufacturing confidence, February vehicle sales, the Fed’s Beige Book, January trade balance and last but not least February non farm payrolls at the end of the week. All of the data will be hit by recent unseasonable US weather and therefore will look weak on balance, but markets will once again not fret a great deal.

There are several other key events this week that will garner market attention including central bank decisions from the Reserve Bank of Australia tomorrow, Bank of England, and European Central Bank on Thursday. Hopes that the ECB will easy monetary policy were dashed somewhat by a higher than expected reading for Eurozone HICP February inflation although there is still a possibility that some easing in liquidity conditions are announced. The RBA and BoE are not expected to change monetary policy settings this week.

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China worries inflicting damage globally

February 26, 2014 — Mitul Kotecha

A combination of worries on both sides of the pond has inflicted damage on risk assets globally. US equities closed lower, Treasury yields dropped, USD was weaker while gold prices rose. In Asia, China growth concerns, overexpansion of credit, and currency weakness are increasingly infiltrating markets globally.

Meanwhile in the US, consumer confidence surprisingly slipped in February, albeit from a high level while the annual pace of house price gains slowed slightly in December. The data added a further layer of pressure on stock markets and US January new home sales data will not help matters as it is likely to give further evidence of slowing housing momentum.

While it is now easy to blame much of the weakness in US economic data on adverse weather conditions hopes / expectations that US data will improve going forward will be tested soon. In the absence of first tier data today, attention will remain firmly fixed on events in China and in particular whether the CNY and CNH registers further declines.

Given all the attention on the Chinese currency, major currency markets have been lulled into tight ranges, with our measure of composite implied G3 FX volatility declining further. Our implied volatility index has now dropped to the lowest levels since the end of October last year.

USD/JPY is likely to face some downward pressure in the short term given the rise in risk aversion and lower US yields overnight. EUR/USD remains supported but remains susceptible to downside risks given the potential for easier monetary policy at the upcoming European Central Bank meeting next week.

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Weak US data overlooked

February 25, 2014 — Mitul Kotecha

Although US stocks could not hold onto record highs overnight they still managed to close higher following on from gains in European equity markets. Firmer US equities will give a positive lead to Asian markets today although the gyrations in CNY and CNH will be watched closely. Our risk barometer as well as the VIX ‘fear gauge” indicate that risk appetite is on a positive trend while US Treasuries and the USD consolidate.

Weaker data in the US in the form of the Chicago Fed activity index and Dallas Fed activity index as well the Markit service sector PMI confidence index were shrugged off by the market, with weakness continuing to be attributed to harsh weather conditions. This theory will be tested over coming weeks as weather conditions normalise but for now markets are giving the US economy the benefit of the doubt.

Meanwhile, Eurozone inflation data yesterday highlighted the significant amount of room that the European Central Bank has to ease policy further. On tap today of note is the French INSEE survey and US consumer confidence, both for February and neither of which is likely to prove particularly market moving.

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What to watch this week

February 17, 2014 — Mitul Kotecha

Despite a slow start to the week there are plenty of events and data this week for markets to chew on for further direction including in the US the February Empire and Philly Fed manufacturing surveys, January housing starts and existing home sales, as well as CPI and PPI inflation and FOMC meeting minutes. Overall the data will look relatively unimpressive, with softer manufacturing confidence, weaker housing data and benign inflation readings likely.

In the Eurozone, the flash purchasing managers’ indices will capture most attention. A slight softening is expected but this will not alter the picture of gradual recovery in the Eurozone economy. Indeed, last week’s better than expected Eurozone GDP release revealing broad based growth of 0.3% in Q4 highlighted the positive recovery path, in turn maintaining positive sentiment for the EUR.

On the policy front the Bank of Japan decides on policy tomorrow but no change is expected despite a disappointing Q4 GDP release this morning, which revealed that growth came in at a paltry 0.3% QoQ compared to 0.7% expected. Nonetheless, the weaker GDP data highlights that the BoJ and government has a big job to do in the months ahead especially given the risks to growth from the upcoming consumption tax hike. USD/JPY may find some support if the data translates into expectations of more aggressive BoJ action.

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EUR and GBP outlook this week

February 10, 2014 — Mitul Kotecha

In Europe, the main focus will be on the preliminary estimate of Eurozone Q4 2013 GDP data which is likely to post a gain of 0.2% QoQ as most countries in the Eurozone are set to have recorded positive growth over the quarter. EUR traded more positively at the end of last week but looks like it will struggle to retain gains versus USD above its 100 day moving average around 1.3608.

Markets will also digest the decision by the German Constitutional Court to effectively defer a decision on Outright Monetary Purchases by the European Central Bank to the European Court of Justice. Although there will be some caution ahead of the March 18 final decision on OMT, EUR will find some, albeit limited relief as it seems less likely that the European Court will strike it down.

In the UK the Bank of England Quarterly Inflation Report will reveal an upward revision to growth forecasts but downward revisions to inflation and importantly an adjustment of forward guidance to a broader range of indicators rather than just unemployment. Indeed, as in the US the BoE will not give the impression that they are about to raise policy rates given the sharp fall in the unemployment rate. GBP/USD will be range bound ahead of the release of the QIR, with gains likely gapped around 1.6471.

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