Articles from May 2013

FED tapering fears worry wise money markets

FED induced volatility across the US Dollar crosses is the major wise money markets theme this week- after the deliberate vagueness from Chairman Bernanke over the taping of asset purchases at the end of last week.
FED tapering fears worry wise money markets
We are desperately trying to discount the effects of withdrawing stimulus, particularly withdrawing it too early, leading to whipsaw action in risk markets and across the USD pairs.

Add to the mix the best consumer confidence figure from the US since the financial crisis and the overall sentiment gets even messier to try and gauge. What exactly is the dominant trend here? An improving US economy or the Fed scaling back asset purchases, the recent volatility suggests no one is quite sure of the answer at the moment.

Apart from the usual month end flows to keep things interesting, today should be reasonably quiet because of a lack of big ticket data. Looking forward to next week there is the ECB and Bank of England monthly meetings plus US non-farm payrolls to digest.

Turning first to the central banks, both are expected to keep policy on hold, with more details from the ECB on its credit easing policy top of the agenda after announcing the bare bones of it last month. June marks the outgoing BoE governor last MPC meeting before Mr Carney takes over and he is not expected hand over with a change to the asset purchase scheme.

Non-farm payrolls for May are expected to show around 175K jobs created and the unemployment rate to continue to fall, from 7.5% to 7.4%.

Fed policy is highly unlikely to be affected to any changes to the data but the tapering effect, as the market tried to second guess the next move by the Fed is likely to be large meaning volatility is here to stay for the time being.

US Dollar gives up recent gains

The US Dollar was the main focus yesterday as US equities opened lower following on from the lower sessions in Asia and Europe.
US Dollar gives up recent gains
The fall in equities came largely from fears that the printing presses would be slowed in the US and this has largely led to a stronger US Dollar.

However comments from Fed officials soothed fears that imminent scaling back was not on the cards and this seemed to help momentum swing into USD weakness.

My thoughts are that we will need to see significant improvements above what we have seen so far in the underlying labour market conditions before the Fed commit to scaling back on asset purchases.

In Europe the European commission revealed that Spain and France are to be granted an extra two years to get their budgets into line.

The softening in tone corresponds to a change in tact away from austerity and towards growth and job creation and it will be interesting if this translates over to the UK.

Elsewhere the Bank of Canada in Mark Carney’s last meeting left rates unchanged but warned that interest rates could rise as economic conditions improved, this led to gains in the Canadian Dollar.

There is little focus for today in relation to economic data with US jobless claims the highlight with an expectation that labour market conditions should maintain their upward momentum. We also have preliminary US GDP with the expectation that the quarter on quarter figure will maintain at 2.5%.

Quiet data week after bank holiday

A shorter week for the UK markets with a bank holiday yesterday leading into a slower week in relation to economic data.
Quiet data week after bank holiday
For today we have US consumer confidence data that should attract some attention to gauge whether the US recovery is continuing and for the wise money markets what the implications of this will be in relation to Fed policy.

Last week Fed Chairman Ben Bernanke opened the door for an early exit of the Fed’s QE programme and this has driven US Dollar gains in the market

For an exit strategy to become a reality we need to see a continuing improvement in the underlying economic data and this is why the consumer confidence data will be important today.

We have more data later in the week of significance with German unemployment figures and German CPI data out tomorrow although these are not expected to spring any major surprises. We will also see the monthly interest rate decision from the Bank of Canada- no change is anticipated.

Last night the minutes from the Bank of Japan were released and showed some division developing within the board in relation to the inflation targeting measures.

Two board members suggested watering down the commitment to monetary easing which hassled to some falls in Japanese equities and to some JPY gains.

Volatile trading remains dominant theme in wise money markets

Volatile trading remains on the cards as we move into the weekend, after wild swings overnight in the Japanese equity markets and Yen as traders and investors remain unsure over overall direction.
Volatile trading remains dominant theme in wise money markets
The Yen traded as high as 154.67 against Sterling before the bottom dropped out of the equity market, which after trading up 2.5 per cent fell to a session low of minus 3.5%, dragging the yen along with it towards the low 152’s.

The overall market closed flat on the day bringing to an end once of the strangest days trading in many years. The question is will that volatility carry through to European and American sessions?

Early signs are that it should be calmer, with Sterling roughly unchanged from where we left it yesterday evening. The biggest move overnight has been in the Euro – Dollar pair, positive European data this morning driving the single currency slightly higher against the Dollar in low volumes with German consumer confidence beating expectations slightly.

Today’s data of note is centred on Europe and the US with more German data due – business climate figures and this afternoon US durable goods orders.

Every high profile US figure is suddenly doubly important in light of the Fed announcement this week, the markets main job over the next few months will be trying to discount the Fed withdrawing stimulus, even if that is still several years away.

Central bank announcements spark volatility across wise money markets

After a barren spell over the last week, an avalanche of data and announcements from central banks across the developed world hit the markets.
Central bank announcements spark volatility across wise money markets
The resulting volatility overnight in Asia and into this morning’s European session stand in stark contrast to the goldilocks conditions we’ve been experiencing for the last few months.

Firstly the Bank of Japan suggested Yen depreciation had gone far enough for the moment, sparking JPY appreciation in the major pairs. Whether the BoJ can control the pace of the Yen movements will be tested to the maximum by the market, and lies at the very heart of whether Abenomics can ultimately be successful.

Today marks the first real test of the economic plan.

The Fed minutes, released yesterday evening, showed the central bank considering slowing the pace of asset purchases “in the next few meetings” but only if the employment situation improved significantly.

The wording was broadly expected by the market, with the Dollar slowly gaining against Sterling and the euro, but the timing definitely was not. Along with a soft Chinese PMI data this morning risk is definitely off the table, with the Nikkei down over 7 per cent overnight and European bourses posting large declines in early trading.

UK data also disappointed, with retail sales lower than expected and the IMF also calling for a readjustment to fiscal policy away from immediate austerity towards higher infrastructure investment.

Today look set to be very volatile, so the lack of more big ticket data today is probably a good thing. Of note is Euro zone PMI this morning and intial jobless claims from the US later this afternoon.

FTSE hits 14 year high

The bull market in stocks and equities has continued to rally with the FTSE hitting a 14 year high yesterday as investors continue to join the party and takes the index to within 2.5% of its highest ever level.
FTSE hits 14 year high
The UK inflation figure was released yesterday and came in under consensus at 2.4% rise vs 2.6% expected.

As the news hit the wire it sent the markets into a flurry of risk off activity for Sterling with the UK Pound making losses against most major currencies and shedding 1 cent against the US Dollar and Euro.

Ahead of today’s FOMC meeting minutes being released we had two senior Federal Reserve officials, speaking yesterday in Frankfurt and New York, playing down speculation that the current ultra-easy monetary policy currently in place at the Fed will not be tapered or reduced at the next meeting until inflation starts to increase.

This helped ease investor worries and sent the Dow Jones and Standard & Poor’s 500 indices racing to record highs.

After yesterday’s inflation figure it will be interesting to see how the MPC voted on further monetary stimulus as the economic situation in the UK continues to send mixed signals.

Any strong hint of an early return to the printing presses could sell Sterling sold off further, although with inflation easing this gives incoming governor Mark Carney more scope to begin his aggressive overhaul in search of growth.

As Federal Reserve members William Dudley and James Bullard spoke yesterday it gave the Euro a much needed boost to move EURUSD above 1.29 for the first time this week and EUR/GBP back below 1.18.

Without any key data today the Euro will take more of a backseat following minutes being released from BoE and Fed today and investors await tomorrows manufacturing and services data from the eurozone for any positive signs of recovery from the shared currency.

US Dollar remains strong ahead of FOMC meeting

The US Dollar took a break from it’s bull run yesterday, as most investors were in profit booking mode.
US Dollar remains strong ahead of FOMC meeting
However, the Dollar still has managed to retain its strength overall against most of its counterparts.

US stocks also ended the session a little lower than its record high on concerns over a correction on the basis that the recent surge had been fuelled by news of strong corporate earnings and acquisitions.

Adding to the slight decline were comments released by Charles Evans of the Federal Reserve that although inflation is being looked at and there are positive signs for the economy, the current stimulus measures will be in place as it is necessary for the near future, in contrast with most upbeat members who tend to lean on the contrary, wanting stimulus to be tightened sooner rather than later.

With mixed messages coming out from all flanks, the FOMC meeting should be an interesting one, with the minutes from Ben Bernanke’s speech expected to drive the Dollar.

Most markets expect more of the same for the Fed Chairman – continuing stimulus for the time being coupled with inflation targets and a rosy picture for the US economy.

The Dollar continued its surge against the Japanese Yen, as Japan’s economy minister maintains that USD/JPY at 100 is the maximum level that can be sustained for the economy as rising bond yields may continue to have a detrimental effect.

Most of the Eurozone region was on a holiday yesterday in a very quiet session for the currency which opens this morning just under 1.29 against the greenback.

It will be a fairly quiet day from Europe again, with only a bond auction in France listed in the economic data calendar, as most of the focus moves to Bernanke’s speech.

Sterling on the other hand, recovered from a six week low against the US Dollar, on the back of UK house prices increasing to record high easing concerns of a stagnant economy.

As per last week’s comment from BOE Governor Mervyn King, most markets were not convinced about the inflation targets of 2% by 2015.

Analysts at Ernst & Young believe that inflation, at a rate of 2.5% is set to continue for another 4 years.

However, King issued a statement that a weaker pound has managed to stimulate exports as the British Pound was the second worst performer this year, after the Yen, amongst the 10 developed market currencies.

FED finally hinting how QE cruise may end

The key developments across the markets this week have been an article giving first details on how the Fed would begin to unwind QE as the economic recovery continues.
FED finally hinting how QE cruise may end
Additionally an upgraded UK growth figure by the Bank of England in its quarterly inflation report and the  euro zone growth figures showing countries right across Europe continuing to struggle.

The higher growth figures expected by the Bank of England have lifted the pound, particularly against the Euro given the continued deterioration in growth across the continent.

The slowdown is slowly spreading from the troubled periphery into the stronger core countries, with Germany positing lower than expected Q1 GDP and France re-entering recession.

The news pushed the Euro to a one month low against the Dollar and depending on the tone of next weeks Fed meeting, where the Fed is expected to continue to discuss unwinding QE and varying the scale of asset purchases, the Dollar could have significant further upside over the coming weeks.

Next week is a busy one for the FX market, with central bank meetings and publications galore.

The Fed and Bank of Japan both have monetary policy meetings, plus we have minutes from this month’s meeting from the Bank of England and Reserve Bank of Australia. The RBA release is eagerly anticipated given the drop in interest rates took the market by surprise.

King signs off with optimistic review

Mervyn King has signed out with an upbeat final quarterly inflation report with growth forecasts increased and inflation forecasts scaled down.King signs off with optimistic reviewKing expects to see unemployment gradually come down which backs up the official data today which showed unemployment levels falling.

The big positive is the expectation that growth expectations are looking rosier and at the same time inflation is softening, previously it has been the other way around.

The report is good news for consumers that have been hit with persistently high inflation and no end in sight for a return to growth.

Although the report gave a short term boost to the Pound on the upbeat growth forecasts, this was short lived as overall we expect the pound to fall in line with a more aggressive Bank Of England as Mark Carney replaces Mervyn King as Governor.

The sparks of life are now evident but until we see the UK economy truly fire into life we can expect the Bank Of England to be proactive and more aggressive which is likely to weaken the pound.

In other news Japanese preliminary GDP beat estimates and this help to continue the positive risk sentiment in Asia until it was dampened by weaker Japanese earning reports.

In the currency markets the Euro came under renewed pressure against the USD as speculation increases for a further rate cut from the ECB following yesterday’s disappointing Q1 GDP data.

In addition the US Dollar is making gains after hints that the Fed is moving closer to exiting their QE strategy.

US Dollar rally on despite risk worries

Strong demand for risk assets boosted markets yesterday with Central Banks supplying the main source of support for investor risk appetite, with a mixture of lower policy rates and quantitative easing providing a major boost.
US Dollar rally on despite risk worries
Furthermore, numerous central banks seem to be talking down their currencies and/or intervening, contributing to the heavy weight versus Greenback.

Normally the Dollar would not improve during times of risk appetite, however it is finding ample support from the fact that Fed policy is set to change direction along with other central banks and the currency is breaking key levels against major currencies including EUR, JPY and AUD .

The rise in US Treasury yields is sustaining the US Dollar, aided by steadier US economic data particularly on the employment side.

Reports in the US are suggesting that the Fed is crafting an exit plan from QE, though the timing is still in question, another aspect assisting the Dollar at the start of this week.

Numerous Fed speeches over coming sessions will likely deliver further hints on any timing or plans for an exit policy. In the meantime, higher US yields and a firmer USD continue to mound pressure on gold prices.

There may be a little restraint in forcing the Greenback higher this week as US data releases are likely to look softer, with retail sales, industrial production and housing starts set to record declines.

Nevertheless, any reversal in the USD or yields could merely deliver improved levels for traders to go long the Dollar and short Treasuries especially as data elsewhere will not look much better.

Indeed, while in Europe there will be a likely bounce in the German ZEW investor confidence index in May, Q1 Eurozone GDP will record a contraction for the sixth consecutive quarter.

Promising headlines from Europe are not about bullish updates such as strong pace of growth or higher rates of return drawing in more capital.

Replacing it you will find, ‘positive’ news from the region is more of the cut of avoiding another crisis state. Yesterday discussions on both Cyprus’ and Greece’s austerity struggles, officials declared the support of a €2 billion for the former and €7.5 billion for the latter.

Nonetheless, we have seen several times before that these funds are just insignificant markers in a much longer-term fix. There are plenty of dangers ahead – and the market will maintain it’s scepticism.