US payrolls clues

September 1, 2010 — Mitul Kotecha

Most investors will be glad to see the back of August, a month that marked the biggest monthly decline in US stocks in nine years. The main imponderable is whether September will be any better. A series of manufacturing surveys globally today will do little to restore confidence although there was some good news in a slight increase in China’s official August purchasing managers index (PMI) as well a stronger than forecast increase in Australian Q2 GDP, which will likely provide some short-term relief for risk trades.

There was also some slight solace for markets in terms of US data at least from the point of view that the data was not as disappointing as many recent releases. Although the August Chicago PMI slipped (to 56.7) consumer confidence increased (to 53.5) though admittedly confidence remains at a relatively low level. The job market situation detailed within the consumer confidence report was more pessimistic in August than the previous month, however, with those reporting jobs hard to get moving higher. This sends a negative signal for Friday’s payrolls data.

There will be more clues to Friday’s US jobs report today which will enable any fine tuning of forecasts to take place in the wake of the August ADP employment report and ISM manufacturing survey. Consensus forecasts centre on a 15k increase in private jobs. Despite the slight increase in the Empire manufacturing survey in August, the falls in other manufacturing surveys point to some downside risks to the ISM today, with a simple average of the three pointing to the ISM closer to the 50 mark, which will highlight a loss in US manufacturing momentum.

Manufacturing surveys elsewhere will also be in focus, with the final PMI readings scheduled to be released for the eurozone and UK. There is likely to be confirmation of the slight drop in the eurozone PMI to 55.0 in August while the UK PMI is likely to drop to around 57.0 over the month. Both surveys remain at a relatively high level but it is clear that activity is moderating in H2 2010 from a healthy level in H2. The data will give little support to the EUR but the currency has found a degree of stability over the last couple of days. Nonetheless, a further downward move is in prospect.

The Fed FOMC minutes provided little for markets to get excited about. The minutes noted concerns about large scale asset purchases from some Fed officials, indicating resilience to increasing quantitative easing despite acknowledging increased downside risks to the growth and inflation outlook. It is unclear exactly what will be the trigger for further QE as acknowledged by Fed Chairman Bernanke last week.

The minutes will do little to help market confidence given the hesitancy to pursue further QE and provide further stimulus to the economy but the USD is likely to benefit from the fact that the Fed may not be as eager to expand its balance sheet further. Other currencies that remain beneficiaries in the current risk averse environment are the JPY and CHF. The JPY may find further upside more difficult given ongoing intervention fears but the trend remains for a lower USD/JPY in the coming weeks.

Posted in Asia, Australia, central banks, China, Currencies, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, FX, Interest rates, Japan, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 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 »

Euro Rally To Fade

June 17, 2010 — Mitul Kotecha

It is not an easy time to forecast currencies. Just as many forecasters fought for the accolade of being the most bearish on the EUR and many others were forced to capitulate or risk falling behind the curve, EUR/USD has started to perk up. Similarly, commodity currencies and many emerging market currencies have bounced.

Perhaps the explanation of these moves is merely position adjustments as traders and investors square positions as they keep one eye on the World Cup or maybe its just fatigue after weeks of selling pressure. Either way, the fact that speculative USD market positioning is at a very high level, suggests there is plenty of scope to take profits on long USD positions.

There are various reasons to expect the calm to give way to renewed tensions, however. Public opposition to austerity plans in Europe, added to the prospects for slowing growth as the plans are implemented, in addition to banking sector concerns, suggest that the outlook for the EUR remains downbeat. These factors also point to the prospects of risk aversion rising over the coming weeks, reversing the recent rally in risk currencies.

Further out, the EUR’s travails will not be over quickly and in the wake of the implementation of austerity plans the EUR will struggle from the impact of relatively slower growth in the eurozone compared to the US and other countries. The EUR will continue to remain under pressure even as risk appetite improves and many risk currencies appreciate.

The interruption of risk as an FX determinant is likely to fade towards the end of the year and investors will then go back to differentiating on the basis of relative growth and interest rate dynamics, which will play well for the USD as US growth strengthens.

Relative growth differentials will also bode well for commodity currencies and there will be scope for plenty of upside in the AUD and NZD as growth strengthens. Both countries have benefited from firm demand in Asia and China in particular and this source of support will likely continue to be beneficial.

Funding currencies including JPY and CHF will likely weaken this year against the USD based on the likely improvement in risk appetite later this year. The outlook for the JPY will be particularly interesting in the wake of the change in Prime Minister in Japan, especially given the new PM’s preference for a weaker JPY and reflationary policies. USD/JPY will likely reach 100 by the end of the year.

GBP should not be seen in the same context as the EUR. Although the UK has got its own share of fiscal problems the new government appears to be moving quickly to mollify both investor and ratings agency concerns. The test will come with the reaction of the emergency budget on June 22nd but I suspect that the downside risk to GBP will be limited.

Unlike the EUR which is trading around “fair value”, GBP is highly undervalued. Arguably past GBP weakness puts the UK economy on a stronger recovery footing. Moreover, problems that Europe will face in implementing multi country austerity plans and widening growth divergence, will not be repeated in the UK. Overall, there is likely to be significant outperformance of GBP versus EUR over coming months

Posted in China, Commodities, Currencies, Economics, Economy, emerging markets, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Greece, Interest rates, Japan, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Criminals Favouring The Euro

May 14, 2010 — Mitul Kotecha

It says a lot for a currency when banks stopped accepting it as a means of exchange. The EUR’s woes continue to pile up and the currency received more bad news unrelated to Europe’s fiscal woes when it was announced that banks and foreign exchange bureax in the UK have stopped exchanging EUR 500 banknotes. The rationale was not because the currency is dropping sharply in value though this is also a credible reason, but due to the fact that 90% of the notes were found to be linked to tax evasion, terrorism and other crimes.

EUR/USD came close to the technical support level around 1.2510. Options barriers will likely provide some strong support around this level, temporarily delaying an inevitable drop to the next support at 1.2457. It was not just the EUR that suffered, with GBP faring even worse, in part due to a wider than expected trade deficit, with GBP/USD heading for a test of 1.4500. Sovereign woes continue to depress the EUR in what is turning into a no-win situation. Fresh austerity measures in Greece, Spain and Portugal failed to assuage market fears, and instead the measures have only heightened concerns about social unrest and a weakening growth outlook.

Posted in Currencies, Economics, Economy, Europe, eurozone, Financial crisis, Fiscal/Budget, FX, Greece, UK. Tags: , , , , , , , . Leave a Comment »

Pandemonium and Panic

May 7, 2010 — Mitul Kotecha

Pandemonium and panic has spread through markets as Greek and related sovereign fears have intensified. The fears have turned a localized crisis in a small European country into a European and increasingly a global crisis.  This is reminiscent of past crises that started in one country or sector and spread to encompass a wide swathe of the global economy and financial markets such as the Asian crisis in 1997 and the recent financial crisis emanating from US sub-prime mortgages.  

The global financial crisis has morphed from a credit related catastrophe to a sovereign related crisis. The fact that many G20 countries will have to carry out substantial and unprecedented adjustments in their fiscal positions over the coming years means the risks are enormous as Greece is finding out. The IMF estimate that Japan, UK, Ireland, Spain, Greece, and the US have to adjust their primary balances from between 8.8 in the US to 13.4% in Japan. Such a dramatic adjustment never been achieved in modern history.

Equity markets went through some major gyrations on Thursday in the US, leading to a review of “unusual trading activity” by the US Securities and Exchange Commission in the wake of hundreds of billions of USDs of share value wiped off in the market decline at one point with the Dow Jones index recording its biggest ever points fall before recouping some of its losses. Safe haven assets including US Treasuries, USD and gold have jumped following the turmoil in markets whilst risk assets including high equities, high beta currencies including most emerging market currencies, have weakened. Playing safe is the way to go for now, which means long USDs, gold and Treasuries.

There is plenty of expectation that the G7 teleconference call will offer some solace to markets but this line of thought is destined for disappointment. Other than some words of comfort and support for Greece’s austerity measures approved by the Greek government yesterday, other forms of support are unlikely, including intervention to prop up the EUR. The ECB also disappointed and did not live up to market talk that the Bank could embark on buying of European debt and it is highly unlikely that the G7 will do so either. Into next week it looks like another case of sell on rallies for the EUR.   Remember the parity trade, well it’s coming back into play. 

Aside from the turmoil in the market there has been plenty of attention on UK elections. At the time of writing it looks as though the Conservatives will win most seats but fall short of a an overall majority. A hung parliament is not good news for GBP and the currency is likely to suffer after an already sharp fall over the last few days. GBP/USD may find itself back towards the 1.40 level over the short-term as concerns about the ability of the UK to cut its fiscal deficit grow. A warnings by Moody’s on Friday that the “UK can’t postpone fiscal adjustments any longer” highlights the risk to the UK’s credit ratings and to GBP.

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