Talk but no action

January 19, 2011 — Mitul Kotecha

The eurozone periphery remains in the eye of the storm but markets may have to wait before any concrete action is taken. The possibility of increasing the size of the bailout fund (EFSF), preparation of new European bank stress tests and/or allowing the EFSF to purchase eurozone government debt are all on the table but so far agreement has been lacking. Ministers apparently rejected the idea of increasing the size of the fund from EUR 440 billion to EUR 750 billion whilst disagreement over stricter criteria may also be hampering any progress.

Nonetheless, the EUR has found renewed support, helped by the firm German IFO investor confidence survey and news that Russia is looking to buy EFSF bonds. EUR/USD upside may be face a hurdle around 1.3500 over the short term and gains above this level are likely to be difficult to sustain given the ongoing uncertainties about the EFSF none of which are likely to be resolved anytime soon. The bottom line is that talk but not action will not be sufficient to keep the EUR supported.

GBP is also doing well, partly on the coat tails of a firmer EUR but also in the wake of an acceleration in UK CPI inflation which came in at 3.7% YoY a two year high, surpassing the Bank of England’s (BoE) ceiling for the 10th straight month. Inflation is likely to remain elevated pushing closer to 4% due to the VAT hike to 20% which came into effect at the beginning of this year. The data puts the BoE in a difficult situation testing the Monetary Policy Committee (MPC) expectation that the jump in inflation will prove temporary. However, the market is increasing taking the stance that a rate hike is going to take placer sooner rather than later, with a growing probability of a rate hike.

Since the end of last year there has been a 25bps spread widening (between 2nd contract rate futures) as markets have become more hawkish on UK interest rate expectations. This has coincided with an increasing correlation with GBP/USD resulting in the currency pair cracking above the psychologically important 1.60 level. Much will depend on whether the BoE’s predictions come true. If inflation remains sticky on the upside the Bank may be forced into an earlier tightening. Whether this is good news for GBP will depend on the economy. The worst case scenario is premature monetary tightening just as austerity measures start to bite.

Posted in Bond markets, central banks, Currencies, ECB, Economics, Economy, Europe, eurozone, FX, Germany, Greece, Interest rates, Ireland, Monetary Policy, UK. Tags: , , , , , , , , , , , , , , , . Leave a Comment »

Positive Data Run Continues

January 5, 2011 — Mitul Kotecha

The batch of data releases in Tuesday’s trading session was generally positive. Leading the way was a stronger than expected increase in the UK manufacturing purchasing managers index (PMI) for December at 58.3 which coming in at a 16-year high. The data gave a boost to GBP though GBP/USD is unlikely to gain much of a foothold above 1.5600.

In the US, factory orders surprisingly jumped 0.7% in November and whilst the data is second tier it does maintain the run of generally upbeat US data. Meanwhile eurozone inflation came in higher than forecast at 2.2% YoY, above the European Central Bank (ECB) target level for the first time in two years. The outcome is unlikely to trigger a response from the ECB especially given that core inflation remains well behaved. After hitting a post CPI release high of 1.3433 EUR/USD is likely to drift lower in the short term.

Separately the Fed FOMC minutes of the December 14 meeting revealed little to surprise. Of note, FOMC members highlighted that the improvement in economic conditions was insufficient to warrant any change to the asset purchase program. The bottom line for the Fed is that the dual mandate of maximum employment and price stability is still not in reach and therefore they will keep the pedal to the floor in terms of policy stimulus. Although a further round of quantitative easing seems unlikely the Fed is likely to stick it out in terms of the $600 billion in planned asset purchases whilst an actual rate hike is unlikely until well into 2012.

Commodity prices dropped sharply overnight with soft commodities and energy prices in particular leading the declines. Commodity currencies fell as a result, with the AUD also impacted by growing worries about the impact of the Queensland floods. Initial estimates suggest that total damage from the flooding could reach AUD 6 billion and as Queensland represents around 19% of Australian GDP, the impact on growth could be significant. Growth could drop by a sharp -0.8% YoY in Q1 GDP. This is based on the assumptions that 40% of all exports will experience a 30% reduction

Today’s data slate in the US will be crucial to provide the final clues to Friday’s December payrolls report. The ADP jobs report, ISM non-manufacturing survey and Challenger job cuts data are all scheduled for release. The run of positive US data will help the USD to trade on a firm footing over the short term but clearer direction will await the outcome of the December jobs report whilst the beginning of the Q4 earnings season next week will also be influential. The exception to USD strength will continue to be Asian currencies where more upside is likely, but I prefer to play this via short EUR/Asian FX than the USD.

Posted in Asia, Australia, central banks, Commodities, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Interest rates, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

All Eyes On US Jobs Data

January 3, 2011 — Mitul Kotecha

Happy New Year!

2010 ended on a sour note especially for eurozone equity markets (and the Australian cricket team) where there has yet to be a resolution to ongoing growth/fiscal/debt tensions.  The EUR strengthened into year end but this looked more like position adjustment than a shift in sentiment and EUR/USD is likely to face stiff resistance around the 1.3500 level this week, with a drop back towards 1.3000 more likely.  In the US there was some disappointment in the form of a surprise drop in December consumer confidence data but pending home sales and the Chicago PMI beat expectations, with the overall tone of US data remaining positive.

There will be plenty to chew on this week in terms of data and events which will provide some much needed direction at the beginning of the year.  The main event is the December US jobs report at the end of the week.   Ahead of this there will be clues from various other job market indicators including the Challenger jobs survey, ADP employment report, and the ISM manufacturing and non-manufacturing surveys.  The data will reflect a modest improvement in job market conditions and the preliminary forecast for December payrolls is for a 135k increase, with private payrolls set to rise by 145k and the unemployment rate likely to fall slightly to 9.7%.

The minutes of the 14 December Fed FOMC meeting (Tue) will also come under scrutiny against the background of rising US bond yields.  In addition, Fed Chairman Bernanke will speak on the monetary and fiscal outlook as well as the US economy to the Senate Budget Panel.   Bernanke will once again defend the use of quantitative easing whilst keeping his options open to extend it if needed.  However, the changing composition of the FOMC with four new members added in 2011 suggests a more hawkish tinge, which will likely make it more difficult to agree on further QE.   In any case, the tax/payroll holiday package agreed by the US administration means that more QE will not be necessary. 

It’s probably not the most auspicious time for new member Estonia to be joining the eurozone especially as much of the speculation last year focussed on a potential break up.  The beginning of the year will likely see ongoing attention on the tribulations of Ireland after its bailout, with looming elections in the country.  Portugal and Spain will also remain in focus as the “two-speed” recovery in 2011 takes shape.  Data releases this week include monetary data in the form of the eurozone December CPI estimate and M3 money supply.  Inflation will tick up to 2% but this ought to be of little concern for the ECB.  Final PMI data and confidence indices will likely paint a picture of slight moderation.   

The USD ended the year on a soft note, with year lows against the CHF and multi year lows vs. AUD registered, but its weakness is unlikely to extend much further.  The key driver will remain relative bond yields and on this front given the prospects for relative US yields to move higher, the USD will likely gain support.  There maybe a soft spot for the USD in Q1 2011 but for most of the rest of the year the USD is set to strengthen especially against the EUR which will increasingly comer under pressure as peripheral tensions and growth divergence weigh on the currency.

Posted in Australia, Bond markets, central banks, Commodities, Currencies, ECB, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Interest rates, Ireland, Monetary Policy, Portugal, Spain, Switzerland, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

The Week Ahead

December 13, 2010 — Mitul Kotecha

As markets make the last strides towards year end it appears that currencies at least are becoming increasingly resigned to trading in ranges. Even the beleaguered EUR has not traded far from the 1.3200 level despite significant bond market gyrations. Even news that inflation in China came in well above expectations in November (5.1% YoY) and increased prospects of a rate hike is likely to prompt a limited reaction from a lethargic market.

At the tail end of last week US data provided further support to the growing pool of evidence indicating strengthening US economic conditions, with the trade deficit surprisingly narrowing in October, a fact that will add to Q4 GDP growth, whilst the Michigan measure of consumer confidence registered a bigger than expected increase in November to its highest level since June.

The jump in consumer confidence bodes well for retail spending and highlights the prospects that US November retail sales tomorrow are set to reveal solid gains both headline and ex-autos sales driven by sales and promotions over the holiday season. Other data too, will paint an encouraging picture, with November industrial production (Wed) set to reveal a healthy gain helped by a bounce in utility output. Manufacturing surveys will be mixed with a rebound in the Empire manufacturing survey in December likely but in contrast a drop in the Philly Fed expected.

The main event this week is the FOMC decision tomorrow the Fed is expected to deliver few surprises. The Fed funds rate is expected to remain “exceptionally low for an extended period”. Despite some recent encouraging data recovery remains slow and the fact that core inflation continues to decelerate (CPI inflation data on Wednesday is set to reveal a benign outcome with core CPI at 0.6%) whilst the unemployment rate has moved higher means that the Fed is no rush to alter policy including its commitment to buy $600 billion in Treasuries including $105 billion between now and January 11.

In Europe there are also some key releases that will garner plenty of attention including the December German ZEW and IFO investor and manufacturing confidence surveys and flash purchasing managers indices (PMI) readings. The data are set to remain reasonably healthy and may keep market attention from straying to ongoing problems in the eurozone periphery but this will prove temporary at least until the markets are convinced that European Union leaders are shifting away from “piecemeal” solutions to ending the crisis. The EU leaders’ summit at the end of the week will be important in this respect. A Spanish debt auction on Thursday will also be in focus.

Assuming the forecasts for US data prove correct it is likely that US bond markets will remain under pressure unless the Fed says something that fuels a further decline in yield such as highlighting prospects for more quantitative easing (QE). However, following the tax compromise agreement last week this seems unlikely. Higher relative US bond yields will keep the USD supported, and as I have previously noted, the most sensitive currencies will be the AUD, EUR and JPY, all of which are likely to remain under varying degrees of downward pressure in the short term. The AUD will also be particularly sensitive to prospects of further Chinese monetary tightening.

Posted in Australia, Bond markets, central banks, China, Currencies, Economics, Economy, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Germany, Interest rates, Monetary Policy, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Edging Towards A Bailout

November 18, 2010 — Mitul Kotecha

A confluence of factors have come together to sour market sentiment although there appeared to be some relief, with a soft US inflation reading (core CPI now at 0.6% YoY) and plunge in US October housing starts reinforcing the view that the Fed will remain committed to carry out its full QE2 program, if not more.

However any market relief looks tenuous. Commodity prices remain weak, with the CRB commodities index down 7.4% in just over a week whilst the Baltic Dry Index (a pretty good forward indicator of activity and sentiment) continues to drop, down around 21% since its recent high on 27 October. Moreover, oil prices are also sharply lower. Increasingly the drop in risk assets is taking on the form of a rout and many who were looking for the rally to be sustained into year end are getting their fingers burnt.

Worries about eurozone peripheral countries debt problems remains the main cause of market angst, with plenty of attention on whether Ireland accepts a bailout rumoured to be up EUR 100 billion. Unfortunately Ireland’s reluctance to accept assistance has turned into a wider problem across the eurozone with debt in Portugal, Greece and also Spain suffering. An Irish bailout increasingly has the sense of inevitability about it. When it happens it may offer some short term relief to eurozone markets but Ireland will hardly be inspired by the fact that Greece’s bailout has had little sustainable impact on its debt markets.

Ireland remains the primary focus with discussions being enlarged to include the IMF a well as ECB and EU. What appears to be becoming clearer is that any agreement is likely to involve some form of bank restructuring, with the IMF likely to go over bank’s books during its visit. Irish banks have increasingly relied on ECB funding and a bailout would help reduce this reliance. Notably the UK which didn’t contribute to Greece’s aid package has said that it will back support for Ireland, a likely reaction to potential spillover to UK banks should the Irish situation spiral out of control. Any bailout will likely arrive quite quickly once agreed.

Although accepting a bailout may give Ireland some breathing room its and other peripheral county problems will be far from over. Uncertainties about the cost of recapitalising Ireland’s bank will remain whilst there remains no guarantee that the country’s budget on December 7 (or earlier if speculation proves correct) will be passed. Should Ireland agree to a bailout if may provide the EUR will some temporary relief but FX markets are likely to battle between attention on Fed QE2 and renewed concerns about the eurozone periphery, suggesting some volatile price action in the days and weeks ahead.

Reports of food price controls of and other measures to limit hot money inflows into China as well as prospects for further Chinese monetary tightening, are attacking sentiment from another angle. China’s markets have been hit hard over against the background of such worries, with the Shanghai Composite down around 10% over the past week whilst the impact is also being felt in many China sensitive markets across Asia as well as Australia. For instance the Hang Seng index is down around 7% since its 8 November high.

Posted in Asia, bank rescue, Bond markets, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Greece, IMF, Ireland, Monetary Policy, Singapore, South Korea, Spain, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »
« Older posts
Newer posts »