Quantitative easing and the USD

July 21, 2010 — Mitul Kotecha

US earnings are coming in ahead of expectations, with Q2 income at the 42 S&P 500 companies reporting so far beating estimates by 11% whilst revenues are 3.3% ahead of forecasts, according to Bloomberg. The overall tone to equities looks positive helped by expectations of an agreement by BP to sell some of its assets and strong earnings reported by Apple after the close of US trade.

Market sentiment was also boosted by speculation that the Fed will embark on fresh monetary stimulus measures. Although there has been no indication that Fed Chairman Bernanke will announce such measures at his semi-annual testimony to the Senate today and to the House tomorrow, speculation of Fed action is rife and there is likely to be some questioning of Bernanke on the issue in the Q&A. If in any way quantitative easing is hinted at by Bernanke, it will act to undermine the USD.

US economic data is helping to compound expectations of further quantitative easing, with yet another weaker than forecast release in the form of a 5.0% drop in June housing starts as hinted at by the bigger than expected drop in homebuilders confidence on the previous day. Separately ABC consumer confidence declined more than expected in the week to July 18, its third consecutive weekly decline, supporting the evidence that consumer confidence is deteriorating once again.

In the absence of major data releases Bernanke’s testimony will be the main driver for markets but earnings from Coca-Cola and Morgan Stanley will also be of interest. Elsewhere the minutes of the Bank of England’s July MPC meeting will be under scrutiny. MPC member Sentance is expected to have voted for a rate hike at the meeting, but any sign that other members joined him, will give GBP a lift. Sentiment for European assets continues to improve, with Greece concluding a well received T-bill auction and Ireland auctioning EUR 1.5bn in 6 and 10-year bonds. Both were heavily oversubscribed although concerns over Hungary continue to linger.

There continue to be various leaks about the European bank stress tests. Banks are expected to detail three scenarios in the results including estimated Tier 1 capital ratios under a benchmark for 2011, an adverse scenario and finally, a “sovereign shock”, according to a document from the Committee of European banking Supervisors. Importantly and perhaps a factor that could hit the credibility of the tests, the sovereign shock scenario is said to not include a scenario of default on sovereign debt.

I continue to see downside risk for the EUR in the wake of the test results, with a “buy on rumour, sell on fact” reaction likely. EUR/USD is vulnerable to a short-term drop to technical support around 1.2763 but much depends on Bernanke’s speech today. Leaks, suggest that around 10-20 banks could fail the bank stress tests, with a total funding requirement in the region of EUR 70-90 billion. Confirmation will have to wait for the official release on Friday ahead of which most currencies are likely to remain range-bound.

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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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Q4 earnings and Chinese data

January 18, 2010 — Mitul Kotecha

Since the start of the year the market has gyrated from “risk on” to “risk off” and back again. On balance the overall tone has been just about positive, with firmer economic data, most notably in China outweighing sovereign debt concerns in Greece and elsewhere. Although debt concerns are unlikely to dissipate quickly, especially given Greece’s inability to convince markets of its plans to cut its burgeoning budget deficit, the “risk on” tone is likely to win.

“Risk off” may be the tone at the start of the week however, as US equities ended the week on a negative note ahead of the Martin Luther King holidays. The holidays will likely keep trading slow. Data wise the main US events housing starts on Wednesday and the Philly Fed on Thursday. Q4 US earnings are likely to take a bigger share of market attention as the earnings season rolls on. Bank earnings will be a key focus, with Citigroup, Morgan Stanley, BoA, Wells Fargo and Goldman Sachs set to report this week.

Given the growing influence of Chinese data on markets the monthly data pack from China will capture more attention than usual on Thursday. In particular, GDP and inflation data will be of most interest. GDP data is likely to reveal an acceleration in growth in Q4 YoY to above 10% but given worries about over heating and following last week’s tightening in China’s monetary policy CPI data will be closely scrutinized. Inflation is likely to pick up further maintaining the pressure for further monetary tightening as well as a stronger CNY.

Elsewhere, in the eurozone the main event is the German ZEW survey tomorrow, which is likely to show further signs of flagging, due to Greek concerns. There is also an interest rate decision to contend with; the Bank of Canada is unlikely to surprise markets as it keeps policy unchanged tomorrow. The UK has a relatively heavier data slate, with CPI tomorrow, Bank of England minutes on Wednesday and retail sales at the end of the week.

The UK data kicked off on a positive note this week, with house prices rising 0.4% MoM in January and 4.1% YoY according to UK property website Rightmove, the biggest annual gain in over a year. Moreover, activity on Rightmove’s website reached a record high in the first full week of the year. The data as well as expectations that Kraft will raise its bid for Cadbury will likely help GBP in addition to other GBP positive M&A news. GBP/USD will look to test resistance around 1.6365 this week.

After a slightly firmer start helped by the weak close to US equity markets on Friday the USD is likely to generally trade on the back foot over the week. Speculative sentiment for the USD has definitely soured into the new-year as reflected in the CFTC IMM data which revealed a big jump in net short positions in the week ending 12 January 2010. Net aggregate USD positions shifted from +1.6k to -51.9k over the week, with the main beneficiaries being the EUR, and risk trades including AUD, NZD and CAD.

Posted in Asia, central banks, China, Currencies, Economics, Economy, emerging markets, equity markets, Europe, Fiscal/Budget, FX, Germany, Greece, Interest rates, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »