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 »

Modest growth in the G3 economies

January 14, 2010 — Mitul Kotecha

A few themes are already becoming evident into 2010. Firstly, the dominance of China and any news on the Chinese economy is becoming increasingly apparent as reflected in the market reaction to trade data and hike in reserve requirements this week. Despite the odd setback the second theme that is developing this year is the “risk on” environment for asset markets. Another theme is the problems and concerns about sovereign debt and ratings, which will likely intensify further.

I could add one more to the list; the underperformance of the Eurozone economy, a theme that is likely to become more apparent as the year progresses. As markets become increasingly bullish about the prospects for China’s economy the opposite is true for the eurozone. Growth over Q4 2009 appears to have lost momentum according to recent data. There is however, expected to be a rebound in November industrial production but this will follow a weak October reading, leaving overall output in Q4 looking lacklustre.

Economic conditions in Japan do not seem to be improving any more quickly, especially in the manufacturing sector as reflected in the surprisingly sharp 11.3% MoM drop in machinery orders in November. Orders have dropped by a whopping 20.5% annually sending a very negative signal for capital spending in the months ahead. Uncertainty over demand conditions has likely restrained capital spending plans whilst the strong JPY has not helped.

The US economy is showing more signs of life but even here the improvements are “modest” as reflected in the Fed’s Beige Book. Consumer spending showed some, limited improvement, whilst manufacturing performance was said to be mixed. In particular, the Beige Book noted that labour market conditions remained soft, with wage pressures subdued. Overall, the report highlighted the likely lack of urgency in a prospective Fed reversal of monetary policy.

In contrast to the modest growth improvements seen in the G3 economies, Australia seems to be powering ahead. Australian jobs data revealed a bigger than expected 35.2k increase in employment and surprise drop in the unemployment rate to 5.5% in December. The only slight negative about the jobs data was that many of the jobs (27.9k) were due to temporary hiring. Nonetheless, the report will give a boost to the AUD aiming for a test of resistance around 0.9326, and solidify expectations for a rate hike next month, when the RBA is set to hike by 25bps.

Posted in Asia, Australia, central banks, China, Currencies, Economics, Economy, emerging markets, FX, Interest rates, Japan, US. Tags: , , , , , , , , , , , , , , , , , , . Leave a Comment »

Ratings Concerns Hit Euro

December 9, 2009 — Mitul Kotecha

Post payrolls euphoria has faded quickly this week. Fed Chairman Bernanke’s cautious comments about growth had weighed on US markets earlier but it is now eurozone concerns that have come to the forefront. Markets were faced with a further reality check following a sharp drop in German industrial production and news that S&P put Greece on watch for a downgrade, with Fitch going a step further and downgrading Greece’s ratings to BBB+ with a negative outlook.

Greece with a budget deficit of 12.7% of GDP was picked on by the ratings agencies but sovereign debt / fiscal concerns apply to several countries across the eurozone. Indeed, since the recent Dubai shock, which continues to weigh on markets following a report today about an accelerated payment clause on $2 billion debt issued by the Emirates utilities provider, concerns have moved quickly to the health of government balance sheets. The potential for more European ratings cuts will keep sentiment towards eurozone markets cautious.

The UK should not be ignored in this respect and attention will turn to the UK pre-budget report though it’s difficult to see what Chancellor Darling can say that will help GBP. Other economic news has been disappointing with Australia registering a bigger than expected trade deficit in October and Japan recording a sharp downward revision to Q3 GDP, all of which will act to contribute to the “risk off” tone to markets today.

Although the direct brunt of the ratings downgrade was felt on Greek bonds the EUR has come under strong selling pressure registering a further sharp move lower from the 1.5141 high printed last week. Capitulation at the failure to break above recent highs led to some selling and this was exacerbated by the negative data and ratings news. EUR/USD is likely to have further to go on the downside but sovereign interest and bargain hunting will likely prevent a more severe decline. EUR/USD technical support is seen around 1.4623.

Posted in Bond markets, central banks, Currencies, Economics, Economy, Europe, FX, Middle East, US. Tags: , , , , , , , , , , , , , , , , . 1 Comment »
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