For A Few Dollars More…

April 22, 2010 — Mitul Kotecha

…or should I say a few EUR more.   This is what the Greek authorities must be wondering.  Once again Greek worries weighed on equities and risk appetite as a whole.  Although the saga is turning into one big yawn, markets have not had their fill with the bad news coming from this small eurozone economy.  Talks between Greek officials, International Monetary Fund (IMF), European Central Bank (ECB) and European Union (EU) began yesterday but are expected to go on for several days or weeks until a joint text is issued on May 15, just days ahead of a EUR 8.5 billion bond redemption by Greece. 

The talks have done nothing to prevent Greece’s bond yields moving higher, with the yield on 10-year bonds pushing well over 8% whilst the spread with Germany debt also blew out to over 500bps.  The main fear in the market is that Greece will ultimately end up restructuring its debt.  Moreover, contagion fears have dealt a blow to southern European sovereign CDS especially Portugal.  It wasn’t plain sailing for German bonds either, with yesterday’s auction of EUR 3 billion of 30-year Bunds failing to sell the full amount. 

Another casualty of ongoing Greece concerns is the EUR, with the currency under performing other majors and still on its path towards EUR/USD 1.3300 in the near term and onto 1.3150 after.   EUR also looks vulnerable on the crosses and EUR/GBP in particular is one to watch, with the 28 January low around 0.86029 likely to be targeted over the near term.  UK employment data gave some relief to GBP yesterday, with further direction coming from retail sales data today and the next televised leaders’ debate.  

At some point the market will become fatigued with consensus beating earnings and the positive impact on equities will become less marked.  This point is approaching but we’re not quite there yet.  Apple, Morgan Stanley and Boeing did not disappoint, with earnings easily beating forecasts.  Boeing’s earnings in particular helped industrials to be the best performing sector on the S&P 500 although the overall index closed marginally lower.

Earnings today include Amazon.com, American Express, Credit Suisse, Microsoft, Nokia, and PepsiCo.  It is becoming plainly obvious that market expectations for earnings are too pessimistic but as noted above the positive market impact of good earnings is likely to wane. 

On the data front, highlights include March existing home sales, jobless claims and Producer Price Index (PPI).   There will be less focus on PPI given that the Consumer Price Index (CPI) over the month has already been released whilst claims are likely to resume a path lower following the jump over the past couple of weeks.   Existing home sales are likely to post an impressive gain as indicated by firm pending home sales data.   

Overall, it appears that risk appetite is creeping back into the market psyche but the ongoing battle between positive earnings/data versus European/Greek woes suggests that there will be no clear direction for markets.  Improving risk appetite will ultimately win but current conditions will leave currencies trading within well worn ranges, with the exception of the underperforming EUR. In contrast the USD index is likely to remain supported, taking solace from positive data releases.

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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.

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What To Watch This Week

April 19, 2010 — Mitul Kotecha

Well so much for a “risk on” week. Market sentiment soured at the end of last week following The US Securities and Exchange Commission (SEC) civil action against Goldman Sachs, in which they accused the bank of fraud. The impact reverberated across markets and risk trades were pulled back as a consequence. Bulls shouldn’t be too downhearted though as the drop in risk trades followed several days of gains and part of the pullback could be attributed to profit taking.

Speculation of similar probes in Europe by financial regulators will cast a shadow over markets early this week. Nonetheless, direction will at least in part come from earnings. So far the run of earnings looks upbeat, with around 83% of the 48 S&P 500 companies reporting, beating analysts’ estimates. Overall profits are forecast to increase by around 30% from a year ago but are on track to easily beat this estimate. Bellwether names including IBM, Apple, Coca-Cola, Boeing, Microsoft, and AT&T report this week.

The meeting between Greek officials, ECB, IMF and EU has been delayed until Wednesday. There is little likelihood of Greece seeing any loan money soon as the need for parliamentary approval in some EU countries and upcoming regional elections in Germany on 9 May will put a spanner in the works. An issue of EUR 1.5bn of 3-month Greek debt tomorrow will act another test of market confidence but the recent widening in Greek debt spreads suggests a less positive reception than the previous sale.

There are also a few central bank meetings to contend with this week including Canada, Sweden, India, Philippines and Thailand. The only Bank likely to hike interest rates out of this bunch is the RBI in India with another hike expected, following closely on the heels of the March move. Canada and Sweden are unlikely to shift policy until at last after the end of Q2 whilst protests in Bangkok, Thailand, and the knock on impact on consumer confidence, have effectively sealed the case for no rate move there.

On the data front, attention will turn to US housing market activity. Markets will be able to gauge further clues to whether recovery in the housing market has stalled. An increase in both existing (Thu) and new home sales (Fri) in March is expected, which may allay some concerns although any improvement is likely to continue to fragile against the background of tight credit and high foreclosure levels.

In Europe, aside from the ongoing Greek sage, sentiment surveys will garner most attention, with the release of the German ZEW (Tue) and IFO (Fri) surveys as well as manufacturing and service sector purchasing managers indices (PMIs) across Europe. On the whole the surveys are likely to reveal some improvement as confidence.

Risk aversion will be slightly elevated at the beginning of this week but strong earnings and improving data will help to prevent too much damage. Consequently Risk currencies will start the week under pressure but any pullback will be limited. Given that speculative positioning in risk currencies such as the AUD, NZD and CAD is well above their three-month average according to the latest Commitment of Traders’ IMM data there will be some scope for profit taking. EUR speculative sentiment has seen some improvement but EUR/USD remains vulnerable to a further pull back to technical support around 1.3302 this week.

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FX / Economic Preview

March 29, 2010 — Mitul Kotecha

The European Union (EU) aid package for Greece and extension of collateral requirements by the European Central Bank (ECB) helped return a semblance of confidence to markets. Although the probability of a Greek default now looks extremely small, further austerity measures, fiscal issues in other EU countries and the negative impact on growth that all of this implies, suggest that Europe will be plagued by various problems for some time yet.

As a result of more favourable market conditions Greece is set to launch a syndicated bond issues today or tomorrow of up EUR 5 billion according to press reports. Attention will also turn to Greek debt rollovers, beginning with EUR 8.2 billion on April 20.

Improving sentiment following the Greece deal has extended to the EUR, with the currency bouncing off its lows around 1.3267. EUR/USD will now look to break through resistance around 1.3446, which would set up a test of 1.3516. There is plenty of scope for short-covering to help the EUR as reflected in the latest IMM Commitment of Traders’ report (a gauge of speculative market positioning) which revealed net EUR positions reaching yet another record low in the week to 23rd March. Whilst sovereign/official buying interest may keep EUR/USD supported this week the currency pair is best played as a sell on rallies.

A similar assessment applies for GBP. Speculative sentiment for the currency also hit a record low in the latest week but unlike the Greek deal helping the EUR, last week’s UK budget has done little to boost GBP’s prospects. Moreover, a report in the Financial Times highlighting hedge funds bets against GBP, suggests that there are still plenty of headwinds against the currency.

Volumes are set to thin out this week ahead of upcoming holidays, whilst the US March jobs report at the end of the week will likely prevent moves out of current ranges ahead of its release. The consensus forecast is for a 190k increase in non-farm payrolls though much of this is likely to reflect hiring for the 2010 US consensus and a rebound from adverse weather effects in February.

In Europe March economic confidence surveys will be watched closely to determine how much damage Greece and general fiscal woes are having on sentiment. Some improvement, in line with the Eurozone Purchasing Managers Index (PMI) and the German IFO business confidence survey, is expected, which will help to give further, albeit limited relief to the EUR.

The Japanese data slate kicked off the week in good form, with the release of February retail sales data, revealing its biggest annual increase in 12-years. It is difficult to see the recovery in sales taking much greater hold given persistent deflation pressures however, and part of the gain probably reflects the government’s shopping incentive program.

Aside from industrial production and jobs data in Japan the key release will be the results of the Q1 Tankan survey on Wednesday. The survey of manufacturers’ confidence is set to show further improvement. USD/JPY is likely to remain supported around 91.67 but will need a further widening in US/Japan 10-year bond yield spreads to push higher.

Posted in Bond markets, central banks, Currencies, Economics, Economy, Europe, Fiscal/Budget, FX, Germany, Greece, Interest rates, Japan, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . 3 Comments »

Calming the Tiger

February 17, 2010 — Mitul Kotecha

As markets enter the year of the Tiger a somewhat calmer tone appears to be ensuing, with risk appetite edging higher helping equities and the beleaguered EUR to recover some lost ground.  US stocks were helped by a firmer than expected reading for the Empire manufacturing survey (to 24.91 in Feb) and a slight uptick in the US NAHB (National Association of Home Builders) index (to 17 in Feb) but consumer confidence remained weak as indicated by the decline in the weekly reading of ABC Consumer Confidence (-49).  

On the other side of the pond the better than expected February ZEW survey (a survey of investor confidence) in Germany (45.1) helped sentiment although it still recorded a decline from the previous month as Greek fiscal/debt concerns weighed on financial market participants’ confidence.  The bigger impetus came from comments by Greek Finance Minister Papaconstantinou who said there would be no need to for a bailout of the country.

Tensions over Greece eased further following news that tax collectors in the country called off a planned strike, helping to allay some concerns that unions will block planned spending cuts.   On the policy front, the EU Council ratified Greece’s plans but with strings attached, giving the country one month to present a report on the timetable for implementing budget cuts for 2010 and three months to outline policy measures required to cut the deficit below 3% by 2012.

Meanwhile, commodity prices have pushed higher helping currencies such as the AUD and NZD to strengthen.  Moreover, the AUD was boosted by more hawkish interest rate expectations following the release of the minutes of the latest RBA policy meeting which indicated that the Reserve Bank was merely pausing in its rate cycle.  Expectations of a rate hike in March increased as a result.

Overall, the recent rally in the USD is looking increasingly overdone and some reversal is likely over coming weeks.  The fact that market positioning has reached extreme levels in particular in the case of the EUR highlights scope for some recovery in the currency, especially now that the worst case scenario of a Greek default has passed.  The outlook for commodity currencies is even more bullish as risk appetite improves further.     

If anything, data today is likely to give further support to the recovery story, with US industrial production and housing starts expected to post healthy gains.  The Fed FOMC minutes may offer some additional insight into the debate over the implementation of exit strategies but there is unlikely to be much elaboration from the recent comments by Fed Chairman Bernanke in his speech to the US Senate in which he hinted that a rise in the discount rate is not far off.  

Risk currencies including many Asian currencies are likely to benefit from the improvement in risk appetite over the short term.  EUR/USD will likely strengthen as more short positions are covered but will face strong technical resistance around 1.3839.   Asian currencies have been resilient to the recent rise in risk aversion and this is likely to continue over the coming weeks.  As risk appetite recovers currency plays including long AUD/JPY , and even some further upside in EUR/USD look favourable.

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