Follow The Oracle

July 12, 2010 — Mitul Kotecha

Many investors are probably wishing they had the psychic abilities of Paul the octopus. The mollusc once again gave the correct prediction, by picking Spain to beat the Netherlands to become the winner of the World Cup. This ability would have been particularly useful for currency forecasters, many of which have been wrong footed by the move higher in EUR/USD over recent weeks.

Confidence appeared to return to markets over the past week helped by a string of rate hikes in Asia from India, South Korea and Malaysia, and firm data including yet another consensus beating jobs report in Australia. An upward revision to global growth forecasts by the International Monetary Fund (IMF) also helped, with the net result being an easing in double-dip growth concerns.

The good news culminated in a much stronger than forecast June trade surplus in China. However, China’s trade numbers will likely keep the pressure on for further CNY appreciation, and notably US Senators are still pushing ahead with legislation on China’s FX policy despite the US Treasury decision not to name China as a currency manipulator.

Political uncertainty on the rise again in Japan following the loss of control of the upper house of parliament by the ruling DPJ party. The JPY has taken a softer tone following the election and will likely remain under pressure. CFTC IMM speculative JPY positioning has increased but this has been met with significant selling interest by Japanese margin accounts who hold their biggest net long USD/JPY position since October 2009 according to Tokyo Financial Exchange (TFX) data.

In the absence of the prodigious abilities of an “oracle octopus” data and events this week will continue to show slowing momentum in G3 country growth indicators but not enough to warrant renewed double-dip concerns. Direction will be largely driven by US Q2 earnings. S&P 500 company earnings are expected to have increased 27% from a year ago according to Thomson Reuters.

There are several data releases of interest in the US this week but the main release is the retail sales report for June which is likely to record another drop over the month. Data and events in Europe include the Eurogroup finance ministers meeting, with markets looking for further insight into bank stress tests across the region. Early indications are positive but the scope of the tests remains the main concern. The July German ZEW survey will garner some interest and is likely to show a further slight decline in economic sentiment.

EUR/USD gains looked increasingly stretched towards the end of last week, as it slipped back from a high of around 1.2722. Technical resistance around 1.2740 will prove to be tough level to crack over coming days, with a pullback to support around 1.2479 more likely. CFTC IMM data reveals that short covering in EUR has been particularly sharp in the last week, with net short positions cut by over half, highlighting that the scope for further short covering is becoming more limited.

Conversely aggregate net USD long positions have fallen by over half in the last week as USD sentiment has soured, with longs at close to a three-month low. The scope for a further reduction in USD positioning is less significant, suggesting that selling pressure may abate.

Posted in Asia, Australia, central banks, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Germany, IMF, Interest rates, Japan, Monetary Policy, Politics, Singapore, South Korea, Spain, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Q2 Economic Review: Double-Dip Recession or Prolonged Recovery?

July 7, 2010 — Mitul Kotecha

I was recently interviewed by Sital Ruparelia for his website dedicated to “Career & Talent Management Solutions“, on my views on my view on the Q2 Economic Review: Double-Dip Recession or Prolonged Recovery?

Sital is a regular guest on BBC Radio offering career advice and job search tips to listeners. Being a regular contributor and specialist for several leading on line resources including eFinancial Careers and Career Hub (voted number 1 blog by ‘HR World’), Sital’s career advice has also been featured in BusinessWeek online.

Please see below to read my article

Since we last discussed the economic outlook at the end of quarter 1, much has happened and unfortunately there has not been a great deal of positive news. I retained a cautiously optimistic outlook for economic recovery for the Q1 Economic Review: elections, recovery and underemployment discussion article, but highlighted that recovery would be a long and drawn-out process, with western economies underperforming Asian economies.

The obstacles to recovery discussed then continue to apply now, including consumers paying down debt, high unemployment, tight credit conditions and weak confidence.

Click here to read the rest…

Posted in Asia, China, Economics, Economy, emerging markets, Europe, eurozone, Fiscal/Budget, FX, Politics, UK, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Stressing About European Stress Tests

June 18, 2010 — Mitul Kotecha

Equities and risk appetite were bolstered by the relative success of the Spanish bond auction on Thursday. The results of the auction in which Spain sold EUR 3 billion in 10 year notes helped to stem some of the pressure on eurozone bond spreads, which despite the generalized improvement in market sentiment over recent days, had been continuing to widen.

Another key indicator that has been suggested that all is not well moving in the opposite direction to the improvement in many risk indicators is the Baltic Dry Index which has dropped by around a third since 26th May 2010.

Perhaps more significant in terms of providing sustainable support for markets was the news that the European Union agreed to publish the results of bank stress tests, slated for the second half of July. This could turn out to be a key stepping stone towards increasing the transparency of the eurozone banking sector.

However, doubts will remain until there is some clarity on the terms of the tests such as whether they include details of sovereign debt exposure. Also, if the stress tests reveal shortcomings in the banks in question it is unclear if government funding will be provided for them. Although the publishing of stress test results is a step in the right direction until these and other questions are answered it is difficult to see markets getting too excited.

It’s not all plain sailing for equity markets despite the relatively positive news in Europe as disappointing US data in the form of a surprise jump in weekly jobless claims and a bigger than expected drop in the June Philly Fed survey weighed in on the side of those expecting both a slow and jobless recovery in the US.

The CHF has been a key mover following the Swiss National Bank policy decision. The decision to leave interest rates unchanged was no surprise, but the change in rhetoric towards a less aggressive stance towards CHF strength opens up the floodgates for CHF buyers. will look to test its all time low around 1.3720.

Another central bank that has shown concern about a strengthening currency is the Bank of Japan but unlike the SNB Japan’s central bank has not intervened for several years. The BoJ in the minutes of its May meeting noted that it will “watch if Europe’s crisis strengthens JPY”, indicating some concern about JPY strength.

This sentiment that was echoed by the Japanese government in the release of Economic Growth Strategy aimed at avoiding an excessive rise in the JPY via fiscal and monetary steps to beat deflation. The JPY barely reacted to both the minutes and the growth strategy, with market players likely sceptical until concrete measures are actually implemented.

It still look like an environment of sell on rallies for the EUR and other risk currencies, with their gains likely to run out of steam over coming days. The next key technical level for EUR/USD is around 1.2454, a level that will prove a tough nut to crack.

Posted in bank rescue, Bond markets, central banks, Currencies, Economics, Economy, equity markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Interest rates, Monetary Policy, Spain, US. Tags: , , , , , , , , , , , , , , , , , , , . Leave a Comment »

The Pain Of A Stronger Swiss Franc

June 9, 2010 — Mitul Kotecha

Volatility and increasingly large market swings are characterizing current market conditions. A warning by Fitch on the UK’s “formidable” fiscal challenge, concerns about Bulgaria’s public finance statistics and a massive public sector strike in Spain, combined to fuel another bout of risk aversion.

Hungary’s government attempted to diffuse worries about its finances, with the country’s Prime Minister listing measures including cutting public pay and prohibiting mortgages denominated in foreign currencies, in order to hit the 3.8% of GDP budget deficit target. There was also some good news in the US, with small business confidence (NFIB) rising to its highest level since September 2008 whilst ABC consumer confidence edged higher.

The US Beige Book and Fed Chairman Bernanke’s testimony on the US economy to Congress, mark the highlights today. The Beige Book is set to reveal further signs of economic recovery but with limited inflation pressures. Bernanke is likely to maintain a similar tone to comments he made yesterday, highlighting a “moderate” economic recovery, with unemployment likely to stay “high for a while”. His testimony will be scrutinized for the timing of rate hikes, and any elaboration on his comments about rates rising before the economy is at full employment.

Against the background of the many and varied uncertainties still afflicting markets maintain a sell on rallies view on risk trades is still the best option. EUR/USD will struggle to breach resistance around 1.2010 and remains susceptible to test support around 1.1826. GBP/USD could target fresh lows in a “negative reversal”, with potential to head back down to 1.3996.

Confidence has plummeted to extreme lows and it will be several months before appetite for risk trades returns. The AUD and NZD as well as many Asian currencies will struggle over the interim period before their appreciation trend finally resumes.

In contrast to the weakening of risk currencies, CHF strength is showing little sign of letting up. Switzerland recorded a massive 50% jump in FX reserves in May to CHF 232 billion from CHF 153 billion in April. This is not usually market moving data but the scale of the jump in reserves is huge and it is not just due to valuation changes. The Swiss National Bank (SNB’s) effective abandonment of defending a particular level in EUR/CHF turned into more a smoothing operation but this did not stop the bank from massive FX interventions. Despite the interventions EUR/CHF dropped by 0.8% over the month.

Aside from alleviating upward pressure on the CHF the interventions had an indirect effect of reducing the pain of holders of CHF mortgages. E.g. around 30% of Hungary’s bank loans and 60% of mortgages are denominated in CHF but countries across Europe have plenty of CHF denominated loans, especially Austria. Although Hungary announced steps to meet its deficit targets its woes are far from over.

The CHF has appreciated by around 3% since the beginning of May versus HUF, exacerbating the pain for CHF borrowers in the country. The fact that CHF strength shows no sign of letting up on the back of strong data and safe haven flows, the pain for these borrowers will only add to the problems for banks and borrowers alike in Europe.

Posted in Australia, bank rescue, central banks, Currencies, Economics, Economy, equity markets, Europe, eurozone, Fiscal/Budget, FX, Hungary, Monetary Policy, UK. Tags: , , , , , , , , , , , , , , , , , , . 2 Comments »

Capital Flowing Out of Europe

May 18, 2010 — Mitul Kotecha

When investors’ concerns shift from how low will the EUR go to whether the currency will even exist in its current form, it is blatantly evident that there is a very long way to go to solve the eurozone’s many and varied problems. As many analysts scramble to revise forecasts to catch up with the declining EUR, the question of the long term future of the single currency has become the bigger issue. Although the EUR 750 billion support package was hailed by EU leaders as the means to prevent further damage to the credibility of the EUR, it has failed to prevent a further decline, but instead revealed even deeper splits amongst eurozone countries.

Although the European Central Bank (ECB) confirmed that it bought EUR 16.5 billion in eurozone government bonds in just over a week, with the buying providing major prop to the market, private buyers remain reluctant to renter the market. As a result of the ECB’s sterilised interventions bond markets have stabilised but the EUR is now taking the brunt of the pressure, a reversal of the situation at the beginning of the Greek crisis, when the EUR proved to be far more resilient. Reports that some large institutional investors have exited from Greek and Portuguese debt markets whilst others are positioning for a eurozone without Greece, Portugal and Spain, suggest that the ECB may have taken on more than it has bargained for in its attempts to prop up peripheral eurozone bond markets.

As was evident in the US March Treasury TICS report it appears that a lot of the outflows from Europe are finding their way into US markets. The data revealed that net long-term TIC flows (net US securities purchases by foreign investors) surged to $140.5 billion in March. The bulk of this flow consisted of safe haven buying of US Treasuries ($108.5 billion), although it was notable that securities flows into other asset classes were also strong especially agencies and corporate bonds, which recorded their biggest capital inflow since May 2008. Asian central banks also reversed their net selling of US Treasuries, with China investing the most into Treasuries since September 2009. Anecdotal evidence corroborates this, with central banks in Asia diversifying far less than they were just a few months ago.

This reversal of flows is unlikely to stop anytime soon. It is clear that enhanced austerity measures in the eurozone will result in weaker growth and earnings potential. This will play negatively on the EUR especially given expectations of a superior growth and earnings profile in the US. Evidence of implementation, action and a measure of success on the fiscal front will be necessary to begin the likely long process of turning confidence in the EUR around. This will likely take a long time to be forthcoming. EUR/USD has managed to recover after hitting a low of around 1.2235 but remains vulnerable to further weakness. The big psychological barrier of 1.20 looms followed by the EUR launch rate of around 1.1830.

Posted in Asia, Bond markets, central banks, China, Currencies, Economics, Economy, eurozone, Financial crisis, Fiscal/Budget, FX, Germany, Greece, IMF, US. Tags: , , , , , , , , , , , , , , , , , . 1 Comment »
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