Will the Fed Calm US Treasury Market Volatility?

March 15, 2021 — Mitul Kotecha

The main market action on Friday was once again in US Treasuries, with another sharp sell off as the 10y yield spiked 8.8 basis points despite three large US debt auctions over the week that were received relatively well by the market.  The sell-off helped the US dollar (USD) to strengthen while oil prices slipped. USD sentiment is clearly becoming less negative as reflected in the latest CFTC IMM data (non-commercial speculative market positioning), which shows that USD (DXY) positions (as a % of open interest) are still short, but at their highest since the week of 8 Dec 2020. Tech stocks didn’t take well to higher yields, but the Dow and S&P 500 closed higher. The move in yields may pressure Asian currencies and bond markets after some consolidation/retracement towards the end of last week though equity markets look better placed. 

At the end of last week US University of Michigan consumer sentiment rose to 83.0 in the preliminary release for March from 76.8 in February and exceeded expectations at 78.5 (consensus). This week attention will turn to a plethora of central banks spearheaded by the Federal Reserve FOMC (Wed). Markets will be watching for any revisions to US growth forecasts amid a dovish tone, albeit with little sign of any push back on higher yields. US rates markets will also focus on the US 20y auction, which could keep the curve pressured steeper.  Nervousness over the Statutory Liquidity Ratio (SLR) exemption, which is set to expire at the end of the month, will also likely intensify.  A less dovish than hoped for Fed, will likely keep the USD on the front foot. 

Other central bank decisions this week will take place in the UK, Norway, Turkey, Russia, Indonesia, Taiwan, Brazil and Japan. None of these are likely change policy settings except Brazil, where the market is looking for a 1/2% hike. Developments to look out for include some push back from the Bank of England on higher yields, a move to bring forward the rate hike path in Norway, a potentially controversial no change decision in Turkey and the Bank of Japan’s announcement of the results of its policy tools and in particular clarification on the tolerated trading range for 10-year JGBs.

Data this week kicks off with Chinese activity data today including February industrial production and retail sales. Seasonal distortions and base effects will make this month’s data look particularly strong.  Other data this week includes US Feb retail sales (tomorrow) where a weak outcome is likely depressed by harsher-than-usual winter weather as well as a fading of the boost from stimulus payments. Australia February employment is also likely to be soft (Thursday).  

Overall, equity volatility has eased, especially in the equity market, suggesting some return of normal trading conditions there, but interest rate volatility remains high driven by the move in US Treasury yields.  The USD gave back some gains towards the end of last week, but will likely benefit from higher US yields and is set to start this week in firm form.  US interest rate gyrations will likely provide further direction for the USD over the rest of the week.   Much of course will depend on the Fed FOMC meeting, which will be the main event this week. 

Posted in Asia, Asian currencies, Australia, Bank of England, Bank of Japan, Bond markets, Canada, central banks, China, coronavirus, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Federal Reserve, FX, Indonesia, Interest rates, Japan, Monetary Policy, Norway, Taiwan, Turkey, UK, US, US administration. Tags: , , , , , , , , , , , , , , , , . Leave a Comment »

Skittish Markets Amid Higher Yields

February 28, 2021 — Mitul Kotecha

The US and to some extent global bond market rout over recent weeks has caused particular pain to crowded growth/momentum stocks.  US 10 year Treasury yields have now risen by around 50 basis points this year, bringing back memories of the 2013 Taper Tantrum and 2016 spike in US yields following the election of Donald Trump as President.  Improving data and falling virus cases have helped fuel the move higher in yields, with the rise in yields hitting equity markets globally and in particular technology stocks as investors focus on the cost of funding amid relatively high valuations in some growth/momentum stocks. 

US rates markets stabilised somewhat at the end of last week after taking a drubbing over much of the week. The rally in interest rate markets on Friday helped to buoy equities, albeit to a limited extent with the Nasdaq managing to eke out gains.  Commodity prices dropped sharply while the US dollar continued to firm up.  Even so market volatility measures such as the VIX (equity volatility) remain elevated.

Currency volatility measures have moved higher too, but not to the same degree as equities or rates.  Emerging markets (EM) FX volatility has reacted even less than developed market FX volatility.  Perhaps this is the next shoe to fall, but so far EM FX have looked relatively well composed despite the rout in rates markets, partly due to a more limited US dollar (USD) reaction than would be expected.  The sharp spike in US yields does not bode well for EM currencies, however.  Higher market volatility, pressure on yield differentials and a slide in growth/momentum stocks could hurt EM assets and it will be very hard for the USD to continue to ignore higher yields. 

While gains in US risk assets may help Asian markets at the beginning of this week any follow through will be dampened by the release of a weaker than expected China manufacturing and services purchasing managers index (PMI) data. The manufacturing PMI dropped to its weakest since May 2020 while the services PMI fell to its lowest since the Feb 2020 COVID related collapse.  I would however, be wary of over interpreting the data given the usual seasonal weakness around Chinese New Year holidays.  Services in particular was impacted by reduced travel over the holidays.  

Other high frequency indicators show that China’s growth momentum remains positive and growth this year is likely to be solid.  More information on the official outlook and forecasts will come from China’s National People’s Congress beginning Friday, which will present the annual work report for 2021 and the release of China’s 14th 5-year plan.  Once again, a growth target for this year will likely be excluded though targets for economic variables are likely while the annual average growth target is likely to be lowered, possibly down to around 5% from “over 6.5%” for the previous 5 years.  

Data on tap this week largely consists of a slew of February PMIs while in the US the February ISM manufacturing survey will be released, with confidence likely boosted optimism about COVID and fiscal stimulus.  Over the rest of the week key releases include US jobs data (Fri), Eurozone February CPI inflation (Tue), Turkey CPI (Wed), UK Spring Budget (Wed), Australia Q4 GDP (Wed) and monetary policy decisions in Australia (Tue), Malaysia (Wed) and Poland (Wed).  None of these central banks are expected to shift policy. 

Posted in Asia, Asian currencies, Australia, Biden, Bond markets, central banks, China, Commodities, coronavirus, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Interest rates, Malaysia, Monetary Policy, Poland, Politics, Trade, Trump, Turkey, UK, US, US administration. Tags: , , , , , , , , , , , , . Leave a Comment »

Asia In Demand

November 16, 2020 — Mitul Kotecha

Equity markets managed to shake off Covid concerns at the end of last week despite virus cases in the US reaching a record high and Europe battling a full-blown second wave; S&P 500 and Russell 2000 hit record highs.  Asian equities started the week building on this positive momentum.  Helping markets was the news that advisors to President-elect Joe Biden have said they oppose a nationwide US lockdown despite the sharp rise in virus cases.  This will help allay fears that the US economy will weaken sharply over the next few months amid severe lockdowns and before a vaccine can be distributed.

Vaccine enthusiasm will likely play against Covid escalation in the days and weeks ahead. In the near-term slim chances of a sizeable US fiscal stimulus taken together with a more rapid increase in global Covid infections highlight clear risks to risk assets, and this may be enough to put roadblocks in place at a time when various equity indices are reaching key technical levels.  Conversely, it is too early to write the US dollar off in the short term even if the medium-term trend is likely to be downwards. 

Asia remains favoured within emerging markets, as the virus has come under control across most of the region.  News of the signing of the Regional Comprehensive Economic Partnership (RCEP) trade deal by 15 countries in the region after 8 years of negotiations, but without the US and India, provides another boost to regional economic and market prospects.  The deal is less extensive than the Trans-Pacific Partnership (TPP) as it removes around 90% of tariffs rather than 100% under TPP.  Nonetheless, it is estimated that the deal could boost the global economy by close to $200bn by 2030.  Although the deal still has to be ratified by a number of countries it is a step closer to a unified trade block like the EU.   

Additionally, Chinese data today ought to be supportive for regional assets even amid the threat of further sanctions by President Trump’s administration in the weeks ahead. China’s October activity data including industrial production fixed assets investment, property investment and the jobless rate were on balance positive, showing that China’s economic recovery is gathering steam.  The data will likely provide further support to China’s markets including China’s currency, though it effectively seals the case for no further easing by China’s central bank, PBoC, while giving the rest of Asia more fuel to rally. 

Over the rest of the week emerging markets central banks will garner most attention, with a plethora of policy rate decisions on tap.  Hungary (Tue), Thailand (Wed), Philippines (Thu), South Africa (Thu), and China (Fri) are set to keep policy rates on hold while Indonesia (Thu) is likely to cut by 25bps and Turkey is expected to hike its policy rate by 475bp hike (Thu).   Turkey in particular will be a focus in this respect given the replacement of central bank governor and the more than 10% rally in the Turkish lira last week.

Posted in Asia, Asian currencies, Australia, Biden, Bond markets, central banks, China, coronavirus, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Europe, FX, Hungary, India, Indonesia, Interest rates, Monetary Policy, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand, Trade, Trump, Turkey, US, US administration. Tags: , , , , , , , , , , , , , , , , . Leave a Comment »

Lingering Disappointment

September 20, 2020 — Mitul Kotecha

Another soft close to US stock markets at the end of last week sets up for a nervous start to the week ahead.  The S&P 500 has now declined for a third straight week, with tech stocks leading the way lower as more froth is blown way from the multi-month run up in these stocks.  Lingering disappointment in the wake of the Federal Reserve FOMC meeting is one factor that has weighed on risk assets.  More details on how the Fed plans to implement its new policy on average inflation targeting will be sought. Markets will also look to see whether the Fed is pondering any changes to its Quantitative Easing program. This week Fed officials will get the opportunity to elaborate on their views, with several Fed speeches in the pipeline including three appearances by Fed Chair Powell. 

Disappointment on monetary policy can be matched with a lack of progress on the fiscal front, with hopes of an agreement on Phase 4 fiscal stimulus ahead of US elections fading rapidly.  A loss of momentum in US economic activity as reflected in the NY Fed’s weekly economic index and declining positive data surprises as reflected in the Citi Economic Surprise Index, are beginning to show that the need for fresh stimulus is growing.  On the political front, the situation has become even more tense ahead of elections; following the death of Supreme Court justice Ruth Bader Ginsburg attention this week will focus on President Trump’s pick to replace her, adding another twist to the battle between Democrats and Republicans ahead of the election.    

Another major focal point ahead of elections is US-China tensions, which continue to simmer away. China’s economy and currency continue to outperform even as tensions mount.  August’s slate of Chinese data were upbeat and China’s currency (CNY) is increasingly reflecting positive economic momentum, with the CNY CFETS trade weighted index rising to multi week highs.  There is every chance that tensions will only get worse ahead of US elections, likely as the US maintains a tough approach in the weeks ahead but so far Chinese and Asian markets in general are not reacting too much.  This may change if as is likely, tensions worsen further. 

After last week’s heavy slate of central bank meetings, this week is also going to see many central banks deliberate on monetary policy.  The week kicks off with China’s Loan Prime Rate announcement (Mon), followed by policy decisions in Hungary and Sweden (both Tue), New Zealand, Thailand, Norway (all on Wed), and Turkey (Thu).  Markets expect all of the central banks above to keep policy unchanged as was the case with the many central banks announcing policy decisions last week.  The lack of central bank action adds further evidence that 1) growth is starting to improve in many countries and 2) the limits of conventional policy are being reached.  While renewed rounds of virus infections threaten the recovery process much of the onus on policy action is now on the fiscal front. 

Posted in Asia, Asian currencies, central banks, China, coronavirus, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Interest rates, Monetary Policy, New Zealand, Norway, Politics, Thailand, Trade, Trump, Turkey, US, US administration. Tags: , , , , , , , , , , , , , , , , . Leave a Comment »

US Earnings, Virus Cases, Dollar & Data

July 20, 2020 — Mitul Kotecha

Last week US equities registered gains, led by value rather than momentum stocks, with US equities closing higher for a third straight week amid low volumes and declining volatility.  However, the S&P 500 is still marginally lower year to date, compared to a 17% gain in the tech heavy Nasdaq index.  In theory this implies more room to catch up for value stocks vs. momentum but I wouldn’t bank on it. If the surge in virus cases equates to renewed lockdowns, the value stock story will likely fail to gain traction until either the virus curve flattens again or a vaccine is found.

Unfortunately Covid-19 infections continue to accelerate, with more than 14 million cases confirmed globally, but mortality rates are likely to be key to the extent that lockdowns intensify. US, Latin America and India are at the forefront, risking another downturn in global activity if lockdowns intensify at a time that concerns about a fiscal cliff in the US have grown.  All of this has to put against vaccine hopes, with some success in various trials, but nothing imminent on the horizon.

Meanwhile the US dollar (USD) remains under pressure, continuing its grind lower since the start of this month, with the euro (EUR) capitalizing on USD weakness to extend gains as it targets EURUSD 1.15.  The USD has maintained its negative relationship with risk, and sentiment for the currency has continued to sour as risk appetite has strengthened.  It’s hard to see the USD turning around soon, especially given uncertainty about renewed US lockdowns, fiscal cliff and US elections.

Over the weekend European Union leaders’ discussions over the “recovery fund” failed to reach a deal though there has been some softening from the “frugal four” on the issue of grants vs. loans.  However, after a third day of meetings there was still no agreement on how much of the recovery fund should be distributed via grants versus loans.  Despite the lack of agreement EUR continues to remain firm against USD and approaching key resistance around 1.1495.

US Q2 earnings remain in focus and this week is particularly busy, with tech earnings under scrutiny (including IBM today).  Last week banks were the main highlight of the earnings calendar, with US banks reporting a very strong quarter in trading revenues amid heightened market uncertainty and volatility, but large loan loss provisions. Aside from earnings expect more jawboning from US officials over China. While there is some focus on whether the US will target Chinese banks with sanctions, it is still likely that the US administration will avoid measures that will roil markets ahead of US elections.  

On the data and event front, highlights over this week include Australia RBA minutes (Tue), Eurozone PMIs (Fri) and policy rate decisions in Hungary (Tue), Turkey (Thu), South Africa (Thu), and Russia (Fri).

Posted in Asia, Asian currencies, Australia, Bond markets, central banks, China, coronavirus, COVID-19, Currencies, ECB, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Fiscal/Budget, FX, Monetary Policy, Trade, Trump, Turkey, US, US administration. Tags: , , , , , , , , , , , . Leave a Comment »
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