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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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 »

Singapore revalues, Asian currencies jump

April 14, 2010 — Mitul Kotecha

The positive tone to risk appetite is keeping the USD on the back foot and for once FX attention has turned away from events in Greece. Before elaborating further and staying with Greece, it’s worth highlighting that the outcome of Greece’s note auction was reasonably solid, with more debt than anticipated being sold. However, the cost of borrowing for Greece rose compared to the previous auction in January, which means that the Greece will still suffer higher funding costs to roll over debt.

The positive reception to the debt offering was not particularly surprising given that it followed so closely after the EU/IMF loan package announcement but it is difficult to see sentiment for Greece and the EUR for that matter, getting much of a lift. The main positive for the EUR is the fact that market positioning remains very short but EUR/USD is likely to struggle to make much headway above technical resistance around 1.3653.

More interestingly Asian central banks are continuing on the track towards fighting rising inflation pressure and Asian currencies, in particular the SGD, were boosted by the Monetary Authority of Singapore (MAS) decision to revalue its currency. Singapore has moved back to a policy of a “modest and gradual appreciation” of the SGD from a policy of zero appreciation, which obviously implies openness to further FX appreciation in the weeks and months ahead.

The rationale for the decision was clear and as revealed in the strong first quarter Singapore GDP data which revealed a 13.1% annual rise. Stronger growth is fuelling growing inflationary concern and to combat this Singapore’s MAS will allow greater SGD appreciation. The reaction in other Asian currencies was also positive, with markets (quite rightly in my view) that other Asian central banks will be more tolerant of currency strength in their respective currencies.

Moreover, Singapore’s move was pre-emptive, perhaps with one eye on an imminent revaluation in China. The recent easing in tensions between the US and China has if anything increased the likelihood that China revalues its currency, the CNY, sooner rather than later, and most likely before the end of Q2 2010. Whatever the rationale, strengthening inflation pressure across the region, will mean a less FX interventionist stance in Asia, and likely stronger currencies over coming months.

Posted in Asia, Bond markets, central banks, China, Currencies, Economics, Economy, emerging markets, Europe, eurozone, Fiscal/Budget, FX, Greece, IMF, Interest rates, Monetary Policy, Singapore, US. Tags: , , , , , , , , , , , , , , , , , , . Leave a Comment »

Greek Aid Boosts Euro

April 12, 2010 — Mitul Kotecha

Greece is never far from the headlines and the big news over the weekend was once again centred on this small (in terms of economy size) eurozone Country, with the agreement by Eurozone members to provide up to EUR 30 billion in loans to Greece. This will be supplemented by additional contributions from the IMF to the tune of around EUR 15 billion. The rate of around 5% for the three-year fixed loan is well below that yielding on Greek debt but above the International Monetary Fund (IMF) standard lending rate. In other words, the terms of the loan are far more favourable than they would currently face in the market.

After weeks of haggling the decision to detail the amount and terms of a loan for Greece will help reassure markets and likely result in a narrowing in Greek spreads over the near term. Further details will be finalised early in the week including conditions imposed on Greece as well as the exact amount of the IMF contribution but the real test of confidence will be the reception to Greece’s EUR 1.2 billion sale of 3 and 6-month paper at the beginning of the week.

Markets were already embarking on a short covering exercise in EUR/USD early last week according to the latest CFTC IMM report which showed a reduction in net EUR short speculative positions. As a result of the weekend’s agreement the EUR looks set to consolidate its gains into the beginning of this week. Further out, there are still plenty of risks ahead and sellers are likely to emerge around EUR/USD resistance at 1.3696.


Data releases this week will be conducive to maintaining further support for risk appetite whilst shoring up recovery expectations. In particular US March retail sales are set to jump on the back of strong autos spending (consensus 1.2% monthly gain). March industrial production is also likely to record a healthy reading (consensus 0.7% month-on-month), whilst gains in both manufacturing (Empire manufacturing and Philadelphia Fed) and consumer confidence (Michigan confidence) for April are likely.

There will also be plenty of attention on Chinese data this week with a plethora of releases over coming days including FX reserves, GDP, loans data, inflation, retail sales and industrial production. In short, the data will continue to reveal a robust economic performance, which will be good for risk appetite and Asian currencies, but will also add to the pressure to revalue the Chinese currency, CNY, soon.

The USD impact will depend on whether the market reacts to firmer risk appetite or signs of stronger US growth. I suspect the former will apply for now, likely keeping the USD on the back foot early in the week. The main beneficiaries include risk currencies such as AUD, NZD and CAD as well as most Asian currencies. AUD/USD is set to target technical resistance around 0.9407 whilst NZD/USD will set its sights on resistance around 0.7252 over the next few days.

Posted in Asia, Bond markets, China, Commodities, Currencies, Economics, Economy, emerging markets, Europe, eurozone, Fiscal/Budget, FX, Greece, IMF, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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