Market angst remains

March 13, 2014 — Mitul Kotecha

The same themes continue to worry markets, with Ukraine and China cited on a daily basis as the main causes of market angst. Additionally there is a growing feeling that US equity indices may have topped out given the lack of additional impetus from earnings or economic data.

There is not much on the data front today that will change this dynamic for markets and what there is will be unimpressive, with US retail sales set to have remained soft in February (consensus 0.2%) as bad weather hit spending.

The main market movers overnight have been commodity prices which continue to weaken, with the CRB commodities index falling while the Baltic Dry Index also took a tumble. Gold continues to outshine hitting a high of $1375 per ounce, benefitting from the continued rise in risk aversion while in contrast copper prices dropped to a four year low around $6495 before rebounding slightly.

Posted in China, US. Tags: , , , . Leave a Comment »

USD to edge higher

October 15, 2012 — Mitul Kotecha

The surprise rise in the US University of Michigan sentiment survey to its highest level in 5 years provides a better backdrop for asset markets at the start of the week although the follow through is likely to be limited. Chinese exports data may help sentiment its worth noting that Chinese imports were weak. Overall, it appears that the appetite for taking on equity risk is easing as prospects of disappointing US Q3 earnings and lingering growth concerns weigh on sentiment.

Markets may nonetheless, be given some encouragement from economic data this week including likely gains in September US retail sales, industrial production and October Empire State and Philly Fed manufacturing surveys. This will be echoed in Europe, with a second straight increase in the German ZEW investor confidence survey expected to be revealed in October. While the data will do little to ease global growth concerns it will at the very least suggest a renewed downturn is not on the cards.

Economic data may however, take a back seat once again as attention will turn to political developments around the EU Council meeting on 18-19 October. Any major developments are unlikely to emerge from the meeting although Spain and Greece will be on high on the agenda. The lack of progress in the eurozone towards a bailout in Spain and the distribution of Greece’s next loan tranche will once again restrain any positive tone to markets, leaving most asset markets within ranges.

Currencies do not look as though they are about to break out of recent ranges. Nonetheless, the USD will likely continue to edge higher against the background of growing cautiousness towards risk assets. Indeed, there has been some major short covering in the USD over the past week as reflected in CFTC IMM data and I expect the trend to continue as QE3 USD fears increasingly fade. Conversely, EUR short positions are building up once again and the lack of traction towards resolutions in Spain and Greece, point to growing EUR downside risks in the days ahead.

Posted in eurozone, US. Tags: , , , , . Leave a Comment »

Bernanke eyed for QE clues

July 17, 2012 — Mitul Kotecha

Range trading is likely to dominate. However, the news flow remains negative, with disappointing retail sales data in the US combined with more the decision by the German constitutional court to delay its decision on the ESM bailout fund until September 12, highlighting the lack of potential for any rally in risk assets in the near term.

The International Monetary Fund (IMF) provided markets with a further dose of caution, with its warning that risks to global growth “loom large” as it cut its forecasts for global growth. Pressure on policy makers to provide more stimulus will grow, but the room for and efficacy of such stimulus is questionable.

The weaker than expected June US retail sales report released yesterday has resulted in fuelling expectations that Fed Chairman Bernanke will announce a shift towards more quantitative easing later today. Consequently the USD has come under pressure losing ground so far this week.

While the USD is set to be restrained ahead of Bernanke’s speech to the Senate we do not believe he will announce a change in stance. Therefore, any USD weakness is likely to prove temporary in the short term. The inability of risk appetite to improve further and the ongoing uncertainties in the Eurozone reinforce the view that the USD’s downside will be limited.

Today’s US releases are likely to reveal gains in June industrial production, and a likely strengthening in long term capital flows in May, factors that will help to provide the USD with further support.

Although the EUR has bounced this week data today will only serve to reinforce its overall downward trajectory. The July German ZEW survey is set to decline further. The range of forecasts for this volatile survey is wide between -10 to -30, with our forecast towards the lower end.

The plethora of negative news in terms of policy progress continues to dampen sentiment and hamper the EUR’s ability to recover. Whether its persistent downgrades of economic growth across Eurozone countries, stalling of reforms and austerity plans, or delays in implementing agreed upon measures, the news is unambiguously bad.

Dashed hopes of progress towards finding and implementing solutions have led to a renewed deterioration in speculative appetite for EUR. Although the potential for short covering remains high, the trigger for any short covering is decidedly absent. We maintain the view that EUR/USD will test 1.2000 over coming weeks.

Posted in eurozone, Federal Reserve, US. Tags: , , , , , , . Leave a Comment »

Germany feeling the pressure

June 14, 2012 — Mitul Kotecha

Stocks fell back into negative territory following yet more soft US economic data. The 0.4% drop in US retail sales ex-autos was particularly disappointing, once again raising expectations that the Fed may need to deliver another round of quantitative easing. The rally in gold prices overnight was in part related to such expectations. Continued pressure on peripheral Eurozone debt reflects another angle of market pressure, not helped by the downgrading of Spain’s credit ratings by Moodys which effectively highlighted that Spain’s call for external help was a sign of weakness.

A further test of sentiment will be in the form of Italian bond auctions today. Perhaps more worrying is the sell off in German debt over recent sessions, indicating that investors are finally realising that Germany will not be spared from a “Grexit”. Whether this prompts Mrs Merkel into some form of action to help stem the crisis is another question entirely. Ahead of Greek elections on June 17 markets will enter into a state of limbo but the bias remains for elevated risk aversion.

FX markets are similarly rangebound, with the USD capped by hopes/expectations of more Fed QE and the EUR capped by peripheral Eurozone tensions. As a result EUR/USD has struggled to sustain break above resistance around 1.2624 and will continue to fail to the topside given the uncertainty around the Greek elections on June 17th. Bad news in the form of the Spanish debt downgrade and peripheral debt pressures, suggest that the EUR will remain under pressure over coming sessions, making it increasingly difficult to hold above the psychologically important 1.25 level.

The main focus today will be on the Swiss National Bank policy decision. While no policy action is expected attention will focus on the SNB’s stance on its 1.20 EUR/CHF floor. Upward pressure on the CHF has intensified over recent weeks as the situation in the Eurozone has worsened, and latest reserves data highlighted a big jump in reserves during May as the SNB had to buy EUR against the CHF. A shift in the EUR/CHF floor looks unlikely but the recent upward pressure on CHF could pale into insignificant compared to any upward pressure following a Greek Euro exit.

Posted in eurozone, Germany, Switzerland. Tags: , , , , , . Leave a Comment »

EUR bounces, GBP gains limited

April 17, 2012 — Mitul Kotecha

Eurozone stress, particularly in Spain continues to act as a weight on market sentiment, with equity markets ignoring a relatively strong US retail sales report. My risk barometer remains at elevated levels and is unlikely to ease anytime soon, suggesting that a cautious tone towards risk assets remains warranted.

Mixed US data releases (firm retail sales but weak Empire Manufacturing) did little to help the USD overnight but the EUR managed to register gains despite ongoing Spanish worries. Fitch ratings stating that Italy’s austerity measures were credible and Moody’s noting that there would not be an imminent change in its ratings outlook for France may have helped the EUR which rose solidly from lows just below 1.30 versus USD.

I continue to see plenty of support for EUR/USD around this level. A heavy data slate today will give further direction but the news will not be so positive out of the Eurozone, with a small drop in the German April ZEW survey expected. Meanwhile, a subdued reading for US housing starts and small increase in industrial production will do little to perk the USD up.

There are plenty of data releases in the UK for markets to get their teeth into including inflation data today, Bank of England minutes tomorrow and March retail sales on Friday. Ahead of the data releases GBP continues to trade with a positive bias against the EUR but has failed to extend gains against the USD.

I do not expect the data to result in a significant change in GBP’s tone, with the MPC minutes in particular likely to reveal a divided view on the need for more quantitative easing. Although we look for a rebound in retail sales in March overall spending is only growing modestly.

After predicting the latest drop EUR/GBP my quantitative model reveals that there is limited scope for further gains in GBP versus EUR over the short term. I had also anticipated gains in GBP versus AUD but there is now limited room for further GBP upside.

Posted in Currencies, eurozone, UK, US. Tags: , , , , . Leave a Comment »
« Older posts