Weak US data overlooked

February 25, 2014 — Mitul Kotecha

Although US stocks could not hold onto record highs overnight they still managed to close higher following on from gains in European equity markets. Firmer US equities will give a positive lead to Asian markets today although the gyrations in CNY and CNH will be watched closely. Our risk barometer as well as the VIX ‘fear gauge” indicate that risk appetite is on a positive trend while US Treasuries and the USD consolidate.

Weaker data in the US in the form of the Chicago Fed activity index and Dallas Fed activity index as well the Markit service sector PMI confidence index were shrugged off by the market, with weakness continuing to be attributed to harsh weather conditions. This theory will be tested over coming weeks as weather conditions normalise but for now markets are giving the US economy the benefit of the doubt.

Meanwhile, Eurozone inflation data yesterday highlighted the significant amount of room that the European Central Bank has to ease policy further. On tap today of note is the French INSEE survey and US consumer confidence, both for February and neither of which is likely to prove particularly market moving.

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US data this week

February 24, 2014 — Mitul Kotecha

Despite a softer tone to US equity markets at the end of last week market tensions appear to be easing, with news over the weekend of the ousting of Ukraine’s President helping in this respect. Although US equities ended the week slightly lower the overall tone to risk appetite was firm.

The G20 meeting proved to be a non event in terms of immediate market impact although the aim to lift GDP by more than $2 trillion over the next five years appears to be ambitious to say the least. However, at least focus has shifted from austerity to growth in terms of G20 thinking.

Last week’s release of the February Markit US PMI manufacturing survey which revealed a stronger than expected reading helped to allay some concerns afflicting markets over the pace of US growth giving markets reason for optimism. Indeed, in general markets have attributed recent weakness in US economic data to adverse weather conditions rather than a shift in growth trajectory.

Unfortunately this week’s US data releases are unlikely to be particularly helpful in shaking off growth worries. Although February consumer confidence is likely to be unchanged at a relatively high reading (tomorrow) declines in new homes sales (Wednesday) and durable goods orders (Thursday) in January will not bode well while a revision lower to US Q4 GDP (Friday) will highlight a slower pace of growth momentum at the end of last year than previously recorded.

The US data is likely to be bond friendly helping to cap gains in Treasury yields as well as restraining the USD. Nonetheless, the message from a plethora of Fed speakers on tap this week will likely be one of continued willingness to maintain the current pace of tapering, with recent and current weakness in economic data being shaken off as bad weather related.

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Positive tone to be sustained

February 18, 2014 — Mitul Kotecha

A quiet start to the week following the President’s Day holiday in the US saw mixed performances among European equity markets overnight. There was however, a continued improvement in risk appetite as indicated by a further decline in the VIX “fear gauge”.

The impulse provided for today’s sessions is limited although markets are likely to get off to a positive start. The USD managed to show some stability following recent pressures, albeit at a low level, while gold prices remained supported above the key 200 day moving average level.

The main event today is the Bank of Japan policy decision which will be watched closely following yesterday’s release of disappointing Q4 GDP data.

The German February ZEW survey is also on tap, with a relatively stable reading likely to be registered although attention appears to be more on the new Italian Prime Minister Matteo Renzie rather than on economic data.

Additionally UK inflation data for January is set to reveal that inflation has dropped below target highlighting that the BoE is going to be in no rush to hike policy rates over coming months

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What to watch this week

February 17, 2014 — Mitul Kotecha

Despite a slow start to the week there are plenty of events and data this week for markets to chew on for further direction including in the US the February Empire and Philly Fed manufacturing surveys, January housing starts and existing home sales, as well as CPI and PPI inflation and FOMC meeting minutes. Overall the data will look relatively unimpressive, with softer manufacturing confidence, weaker housing data and benign inflation readings likely.

In the Eurozone, the flash purchasing managers’ indices will capture most attention. A slight softening is expected but this will not alter the picture of gradual recovery in the Eurozone economy. Indeed, last week’s better than expected Eurozone GDP release revealing broad based growth of 0.3% in Q4 highlighted the positive recovery path, in turn maintaining positive sentiment for the EUR.

On the policy front the Bank of Japan decides on policy tomorrow but no change is expected despite a disappointing Q4 GDP release this morning, which revealed that growth came in at a paltry 0.3% QoQ compared to 0.7% expected. Nonetheless, the weaker GDP data highlights that the BoJ and government has a big job to do in the months ahead especially given the risks to growth from the upcoming consumption tax hike. USD/JPY may find some support if the data translates into expectations of more aggressive BoJ action.

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US dollar under pressure

February 17, 2014 — Mitul Kotecha

US stocks have clawed back almost all their losses registered in the wake of the mini emerging markets crisis in January. The S&P 500 closed at 1838.63, up 0.48% on Friday. The rally in stocks is impressive considering the run of weaker than forecast US data releases over recent weeks although investors appear to be placing much of the blame on poor weather conditions. The gains in US stocks echoes the generalized improvement in risk appetite, with sentiment towards emerging markets also having stabilized.

The USD continues to be a casualty of the firmer risk tone, with a lack of upward momentum in US yields also not helping the currency (10 year US Treasury yield around 2.7428%). The USD index is now close to its lows for the year around 80.00, with the JPY and commodity currencies the biggest gainers so far this year among major currencies. In terms of emerging market currencies the Indonesian rupiah and Thai baht have been the best performers versus USD.

Despite the firmer tone to risk, gold prices have continued their ascent, closing above their 200 day moving average at the end of last week. As I wrote in Gold breaches its 200 day moving average, I don’t expect the rally in gold prices to be sustained. Some market consolidation is likely today with a lack of key data releases and a US holiday (President’s Day) keeping activity subdued.

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