US Earnings, Virus Cases, Dollar & Data

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).

Nervousness Creeping Back – US dollar firmer

Last week ended on a sour note as concerns over second round virus cases intensified; Apple’s decision to close some US stores in states where cases are escalating added to such concerns. This overshadowed earlier news that China would maintain its commitment to buying US agricultural goods.  Although on the whole, equity markets had a positive week there is no doubt that nervousness is creeping back into the market psyche.  Indeed it is notable that the VIX equity volatility “fear gauge” ticked back up and is still at levels higher than seen over most of May.

Economic recovery is continuing, as reflected in less negative data globally, but hopes of a “V” shape recovery continue to look unrealistic.  In this respect the battle between fundamentals and liquidity continues to rage.  Economic data has clearly turned around, but the pace of improvement is proving gradual.  For example, last week’s US jobless claims data continued to trend lower, but at a slower pace than hoped for.  A second round of virus cases in several US states including Florida, Arizona and the Carolinas also suggest that while renewed lockdowns are unlikely, a return to normality will be a very slow process, with social distancing measures likely to remain in place.  Geopolitical tensions add another layer of tension for markets.  Whether its tensions between US/China, North/South Korea, India/China or the many other hot spots globally, geopolitical risks to markets are rising.

The USD has benefitted from increased market nervousness, and from US data outperformance, with US data surprises (according to the Citi economic surprise index) at around the highest on record.  JPY has bucked the trend amid higher risk aversion as it has regained some of its safe haven status. GBP was badly beaten last week selling off from technically overbought levels, amid fresh economic concerns and a dawning reality that a Brexit trade deal with the EU may be unreachable by year end.  EUR looks as though it is increasingly joining the club on its way down. Asian currencies with the highest sensitivities to USD gyrations such as KRW are most vulnerable to further USD upside in Asia.

Data highlights this week include the May US PCE Report (Fri) which is likely to reveal a bounce in personal spending, Eurozone flash June purchasing managers indices (PMIs) (Tue) which are likely to record broad increases, European Central Bank meeting minutes (Thu), which are likely to reflect a dovish stance, and several central bank decisions including Hungary (Tue), Turkey (Thu), New Zealand (Wed),  Thailand (Wed), Philippines (Thu).   The room for central banks to ease policy is reducing but Turkey, Philippines and Mexico are likely to cut policy rates this week.

 

 

ECB meeting, Brexit, Fed minutes, China trade, India elections in focus

This week there a number of key events to focus attention on including European Central Bank (ECB) policy meeting, Federal Reserve FOMC March minutes, the commencement of India’s general elections, China data, and further Brexit developments as UK Prime Minister May tries to gain a further short extension to the Brexit deadline, until June 30.

The better than expected US March jobs report, revealing a bigger than expected 196k increase in jobs, with a softer than expected 0.1% monthly increase in hourly earnings, which effectively revealed a firm jobs market, without major wage pressures, helped US markets close off the week on a positive note. The data adds to further evidence that the Fed may not need to hike policy rates further.

The European Central Bank decision is likely to prove uneventful though recent comments by ECB President Draghi have fuelled speculation that the central bank will introduce a tiered deposit system to alleviate the impact of negative rates on banks.   EUR is unlikely to benefit from this.  Separately Fed FOMC minutes will be scrutinised to ascertain how dovish the Fed has become as the markets shift towards pricing in rate cuts, but it is unlikely that the minutes provide further fuel to interest rate doves.

Friday is the deadline to agree on an extension with the EU to prevent a hard Brexit.  Meanwhile PM May is set to restart talks with opposition Labour Party leader Corbyn to thrash out a cross party agreement on Brexit terms ahead of an EU summit on Wednesday that will look at her request for a Brexit extension until June 30.  GBP has lost momentum lately and investors appear to be fatigued with the daily Brexit news gyrations.

Meanwhile, US-China trade talks appear to be edging towards some sort of a deal while Chinese data this week is also likely to be supportive for risk assets.   As China eases financing conditions, evidence of a pick up in the credit impulse will be evident in March aggregate financing, new loans and money supply data this week.   Meanwhile China’s March trade data is likely to look better or at least less negative than over recent months. This suggests that risk assets will likely fare well this week.

India will be in the spotlight as India’s multi stage elections kick off on Thursday.  Prime Minister Modi is in good stead to ahead of elections, boosted by his government’s reaction to recent terrorist attacks on Indian paramilitary in Kashmir.   Concerns that Modi’s ruling BJP would lose a significant amount of seats in the wake of state election losses towards the end of last year have receded.  Nonetheless, election uncertainties may keep the INR on the backfoot this week.

Equities weaker, US yields lower, USD softer

The US Federal Reserve’s rejection of capital raising plans by several banks taken together with further confrontation between the US and Russia and a disappointing US durable goods orders report were sufficient to result in a sell off in equity markets, lower US yields and a weaker USD.

Gold failed to benefit in yet a further sign that its bull run has ended, with the metal honing in on its 200 day moving average at 1296.71. On the US data front headline February US durable goods orders beat expectations (2.2%) but core orders (-1.3%) were weaker than expected.

Although the lead for Asia is a weak one markets may still find some resilience due to expectations of policy stimulus from China. Similarly dovish talk from the European Central Bank will offer further support to market sentiment while undermining the EUR somewhat. On the data front today the main releases are US Q4 GDP revision (upward revision likely), and UK retail sales (rebound likely).

Eurozone data releases this week

There are several first tier Eurozone data releases on tap this week including March flash purchasing managers indices (PMIs), preliminary HICP inflation and the March IFO business confidence survey.

We look for a slight increase in the “flash” composite PMI, with the data restrained by concerns about China and the Ukraine. Inflation in March could move lower, while the German IFO survey is expected to flat. The data will not be particularly spectacular but ought not to detract from the fact that growth momentum in the Eurozone is picking up.

Lower inflation may provide more support to lower policy rates from the European Central Bank but some of the pressure on the ECB to ease policy rates may have eased given the decline in the EUR last week.

After last week’s sharp drop EUR/USD is likely to consolidate around 1.3800 over coming days.

%d bloggers like this: