Double Whammy

June 30, 2010 — Mitul Kotecha

Markets were dealt a double whammy resulting in a broad global equity and commodities sell off, and a jump in equity and FX volatility. The risk asset selling began following the news that the Conference Board revised its leading economic indicator for China to reveal a 0.3% gain in April compared to 1.7% increase initially reported earlier.

Given that this indicator has not been a market mover in the past it is difficult to see how it had such a big impact on the market but the fact that the release came at a time when the mood was already downbeat gave a further excuse to sell.

The damage to markets was exacerbated by a much steeper drop than forecast in US consumer confidence, with the index falling to 52.9 in June, almost 10 points lower than the consensus expectation. Consumer confidence remains at a relatively low level in the US, another reason to believe that the US economy will grow at a sub-par pace.

Renewed economic and job market worries were attributable for the fall in confidence, with an in increase in those reporting jobs as “hard to get” supporting the view of a below consensus outcome for June non-farm payrolls on Friday. Further clues will be derived from the June ADP jobs report today for which the consensus is looking for a 60k increase.

A run of weaker than forecast US data releases over recent weeks have resulted in a softening in the Fed’s tone as revealed in the last FOMC statement as well as a fears of a double-dip recession. There will not be any good news today either, with the June Chicago PMI index set to have recorded a slight decline in June, albeit from a high level.

There will also be attention on the release of the US Congressional Budget Office (CBO) 10-year budget outlook, which will put some focus back on burgeoning US fiscal deficit and relative (to Europe) lack of action to rectify it.

European worries remain a key contributor to the market’s angst, with plenty of nervousness about the repayment of EUR 442 billion in 12-month borrowing to the ECB. Demand for 3-month money today will give clues to the extent of funding issues in European banks given that the 12-month cash will not be rolled over.

Elevated risk aversion will keep most risk currencies under pressure, with the likes of the AUD, NZD and CAD also suffering on the back of lower commodity prices. The AUD has failed to gain much traction from a purported deal being offered to miners including various concessions to the mining industry. Much will depend on the reaction of mining companies, and despite the concessions there is importantly no reduction in the 40% rate of the tax.

Equity markets, especially the performance of Chinese stocks will give direction today but a weak performance for Asian equities points to more risk being taken off the table in the European trading session. EUR/USD will now set its sights on a drop to support around 1.2110 ahead of a likely drop towards 1.2045. Having dropped below support around 88.95 USD/JPY will see support coming in around 87.95.

Asian currencies also remain vulnerable to more selling pressure today, with the highly risk sensitive KRW looking most at risk in the short-term, with markets likely to ignore the upbeat economic data released this morning. USD/KRW looks set to target the 11 June high around 1247.80. Other risk sensitive currencies including MYR and IDR also face pressure in the short-term. TWD will be slightly more resilient in the wake of the China/Taiwan trade deal but much of the good news has been priced in, suggesting the currency will not escape the downturn in risk appetite.

Posted in Asia, Australia, Bond markets, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Interest rates, Japan, South Korea, 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 »

The Good, The Bad And The Ugly

April 21, 2010 — Mitul Kotecha

GOOD: Positive earnings. The biggest earnings news of the day was from Goldman Sachs reporting that profits almost doubled in Q1. Apple also beat estimates and its shares surged. 82% of US earnings have beaten expectation so far. There is still a long way to go in the earnings season but the growth/earnings story is helping to maintain the positive bias to risk trades. There will be plenty of attention on earnings, including AT&T, eBay, Morgan Stanley, Starbucks, Boeing and Wells Fargo.

Data releases remain upbeat, with the April German ZEW investor confidence survey beating consensus, whilst central banks delivered hawkish messages across the board including the Reserve Bank of Australia policy meeting minutes, which pointed to another interest rate hike in May. However, the biggest impact came from the Bank of Canada which unsurprisingly left rates at 0.25%, but removed the conditional commitment to keep policy on hold until the end of Q2, leaving a rate hike on June 1 very likely.

The CAD jumped on the back of the outcome, with USD/CAD dropping below parity. I continue to like CAD alongside the AUD and NZD and believe they will be the star performers over the coming months despite lofty valuations.    Near term targets for CAD, AUD and NZD vs USD are 0.9953, 0.9407, and 0.7195, respectively. 

BAD: Talks between Greek officials and the IMF, ECB and EU on the conditions for a EUR 45 billion bailout loan will also be of interest although completion of talks could take weeks and in the meantime the situation is unlikely to improve, with Greece needing around EUR 10 billion to cover obligations by end May. Greek bond yields jumped to fresh record highs around 7.84% yesterday whilst the spread over German bunds also widened. Moreover, although Greece’s sale of EUR 1.95 billion in 13-week paper yesterday was heavily oversubscribed the, the yield was high at 3.65% which was far higher than the 1.67% yield at a similar sale in January.

In contrast to the likes of the CAD, AUD and NZD, the EUR is set to continue to suffer and as reflected in the widening in Greek bond spreads and high funding costs, Greek woes will keep plenty of pressure on the currency, with EUR/USD set to fall to support around 1.3300 in the short-term.

UGLY: UK regulator FSA will conduct a formal investigation of Goldman Sachs. The FSA will work closely with the US Securities and Exchange Commission SEC, which has accused the bank of Fraud though this has vehemently denied by Goldman Sachs. Although the negative market impact of the fraud case has been outweighed by good earnings and data the fallout is spreading. Some European politicians have even called for governments to stop working with the bank.

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

Shaking Off The Bad News

April 20, 2010 — Mitul Kotecha

Markets managed to shake off the initial shock of the SEC’s fraud case against Goldman Sachs following news that the charge was not approved unanimously, but with a 3-2 vote. This was interpreted by some to imply that there was more of a political rather than economic bias behind the charge, with two Democrats voting for and two Republicans voting against and SEC Chairman Schapiro siding with the Democrats.

Stronger than forecast earnings from Citigroup and a bigger than expected 1.4% jump in US March leading indicators also helped to calm market nerves, with US equities closing higher and the VIX volatility index reversing some of its spike higher. Attention is still firmly fixed on earnings and with 121 S&P 500 companies due to release earnings this week including Apple, Goldman Sachs, Johnson & Johnson and Yahoo today.

Nonetheless, it is difficult to see sentiment improve too much against the background of ongoing worries about Greece as reflected in the renewed widening in Greek debt spreads yesterday. Moreover, the negative economic impact of the spread of volcanic ash from Iceland, and potential for more lawsuits related to CDOs from regulators as well as investors, against banks, will continue to act as a drag on market risk appetite.

Earnings have been positive so far into the season and as seen overnight, this is helping to counter market negatives, giving risk appetite some support. In turn, this will give risk currencies some relief but given the gyrations between positive and negative news it is difficult to see most currencies breaking out of recent ranges.

My overall bias is for positive earnings and data to overcome the negatives this week, leaving the likes of the AUD, NZD and CAD as well Asian currencies firmer. The EUR and GBP are likely to remain the weakest links, with both currencies set to retrace lower and EUR/USD finding plenty of sellers above 1.3500.

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Shaping up to be a “risk on” week

April 15, 2010 — Mitul Kotecha

It’s most definitely turning into a “risk on” week. On the earnings front both JP Morgan Chase and Intel beat forecasts whilst data releases did not disappoint either. In particular, US retail sales came in much stronger than expected. The Fed’s Beige Book also gave markets some good news to chew on. The reports from the twelve Federal Reserve Districts noted that economic activity “increased somewhat” since the March 3rd report.

The positive tone will continue today with the release of the March industrial production data, expected to show a strong gain over the month (consensus 0.7%), whilst both the Empire State and Philly Fed manufacturing surveys are set to post small gains in April, consistent with strengthening manufacturing activity in the months ahead.

Fed speakers have also been helpful for market sentiment. Fed Chairman Bernanke sounded a little more upbeat on the economy but highlighted the “significant restraints” remaining in the US economy. Bernanke maintained the “extended period” of low rates statement despite some speculation that the Fed was verging on removing this. The net impact of the testimony, improved data and earnings and firmer risk appetite is to keep the USD on pressure. In contrast, commodity currencies including AUD, NZD and CAD, will benefit, both from firmer risk appetite and an upturn in commodity prices.

Despite the positive reception to Greece’s debt auction there is not a lot of faith in the ability of Greece to weather the storm. Reports that Greece will need far more funding than has been initially promised by the EU/IMF – potentially as high as EUR 90 billion over coming years – together with worries about selling the loan package to the public in Germany and other eurozone countries, as well EU comments that Portugal will need further fiscal consolidation, have not done much good for confidence. Technically EUR/USD will see plenty of resistance around 1.3692.

After Singapore’s move to tighten monetary policy via the SGD revaluation, and following close on the heels of India, Malaysia and Vietnam, attention has turned to who’s next in line. South Korea must be a prime candidate, especially following data yesterday revealing a drop in the unemployment rate. Of course, China is very much in the spotlight and is set to embark on monetary tightening measures as well as CNY revaluation soon.

India is set to move again as early as next week, with inflation data today likely to seal the case for another hike (consensus 10.37% in March). The risk remains however, that many Asian central banks are moving too slowly to curb building inflation pressures and may find that they ultimately need to tighten more than they otherwise would have done.

China’s heavy slate of data released will if anything fuel greater expectations of an imminent CNY revaluation as well as monetary tightening. China’s economy grew a very strong 11.9% in Q1, above already strong consensus expectations, whilst CPI rose 2.4% YoY in March.

The growth data alongside further evidence of accelerating real estate prices highlight the risks of overheating in the economy and the need to act quickly to curb inflation threats. Given this expectation, firm risk appetite, and more follow through from Singapore’s FX move, the outlook for other Asian currencies remains positive.

Posted in Asia, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Germany, Greece, IMF, India, Interest rates, Monetary Policy, Singapore, South Korea, US. Tags: , , , , , , , , , , , , , , , , , , , , , . 1 Comment »
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