Risk appetite is back on the menu

Risk sentiment remains buoyant following the aggressive easing by the Bank of Japan (BOJ) which the market is now pricing in as a move into risk.Risk appetite is back on the menuAsian markets and equities continue to rally and we are also seeing a follow through into gains in commodity currencies and US Dollar weakness.

The GBP/USD exchange rate has managed to squeeze higher still on this momentum and EUR/USD is also looking healthier.

Yesterday we had the FOMC minutes which through a slip up were actually leaked earlier than expected.

The minutes suggest a slightly more hawkish tone than what is being followed through by the FED in policy actions, however the markets shrugged off this tone believing the FED will continue to stick to its asset purchases at a rate of $85 billion per month through to year end.

On Friday we have US retail sales which is expected to show that consumer spending is softening in response to higher taxes and lower disposable income- if so this would support the FED keeping their foot on the QE pedal.

Yesterday Chinese data was also supportive for a move into risk as China announced mild trade deficit which to some extent dispels concerns of a weak domestic demand.

In addition outlook in China was supported by a tempering in inflation confirmed in the inflation report easing pressure for monetary tightening.

In the currency markets all eyes are watching US Dollar/JP Yen which is testing the key level of 100.

So far it has failed to breach it and remains a key psychological barrier which if exceeded would demonstrate the effectiveness of the BOJ policy in relation to depreciating the Yen.

Elsewhere we do not have any major data releases and the markets will continue to look to maintain the move into risk.

UK trade deficit data disappoints wise money markets

The wise money markets have generally been range bound this week with the markets taking stock.UK trade deficit data disappoints wise money marketsThe conclusion of the Euro group meetings yesterday did little to infuse volatility into the markets, leaving us with a slightly weaker Euro and a stronger Greenback.

Yesterday, German Chancellor Angela Merkel was in Greece for the first time since the crisis emerged to discuss further steps on her announcement of a permanent bailout fund for the nation’s debt.

She maintained her pressure on Greece and her stance still remains that they will need to meet the €13 billion of austerity measures in order to receive further assistance of a bailout package. Though the Greek PM agreed to the deal, the city remained in lockdown as protestors gathered outside parliament protesting against the German Chancellor’s terms.

Following the IMF’s downgrade for global growth, most of the strength was inclined to the Dollar as it gained against most currencies. Also, concerns about Europe’s economic slowdown have put a halt to the recent surge in the Euro, keeping it well below the 1.30 mark.

There are also concerns over the momentum of Britain’s economy, as growth is really sluggish in the region. There was a slide in manufacturing numbers from the UK and industrial production fell by 1.1% from July. The contraction in manufacturing also suggests that the growth in July was a temporary one-off move. Sterling came under further pressure late in the day yesterday after the UK trade deficit figures showed a drastic widening to more than double the size that it was in July, as its imports exceeded its exports by £4.2bn. The move broke the psychological 1.60 support level against the dollar. In the wake of these concerns, there is speculation that the BOE will expand stimulus when they meet again next month.

FED’s Ben Bernanke launches QE3

The money markets have extended their risk rally even further after Fed chairman Ben Bernanke has announced a third round of Quantitative Easing (QE) for the US economy. FED's Ben Bernanke launches QE3The move was almost certain; after last week’s non-farm payroll data indicated that the employment levels were very low and as markets turned negative on the recovery of the US economy.

Even though the QE3 announcement has pledged to buy an extra $40 billion worth of assets (mortgage backed securities) until the economy gets back into recovery, Bernanke still insists it may not be enough unless unemployment is driven to lower levels.

The main difference this time is that should it not be enough, they can increase the amount of purchases at any time.

Interest rates are set to be on hold till 2015 in the US and the price of gold soared post the announcement in tandem with the euro crossing the 1.30 mark – trading at its highest level since May 10.

With a weak dollar, post the QE announcement, the surge in the euro was also helped with some positive news from the euro zone as the ESM was ratified and given the go-ahead to aid the eurozone recovery.

Furthermore, not only will the ECB help Spain and Italy by buying bonds from the struggling economies, as they need immediate help, there is also a possibility that they would extend help to Portugal, Ireland and Greece.

The Greek PM has also reinstated that a third bailout package is not necessary, even though most investors continue to anticipate further aid for the troubled economy.

With so many events emanating from the US and Europe, Sterling has managed to ride on the back of euro strength to highs crossing the 1.62 mark, yet fall to two month lows against the Euro to 1.2420.

The wise money markets wait for Ben

Jackson Hole is almost upon us. The wise money markets wait for BenThe question remains whether the Chairman will make the announcement the wise money markets want – further QE – or disappoint it by “only” announcing an extension or modification to operation twist.

Market sentiment about the likelihood of this has oscillated wildly, from nailed on certainty last week (after the Fed minutes) to looking increasingly unlikely after the continuation of positive US data this week.

US growth for the second quarter was revised up as expected to 1.7% from 1.5% and positive personal consumption data is due out this afternoon.

Ben Bernanke is due to speak at 3pm tomorrow, followed by the Bank of England’s Andy Haldane and Adam Posen.

The Dollar has remained remarkably stable over the last few days, but whatever happens tomorrow we can expect increased levels of volatility as we move towards the ECB meeting next week.

Speaking of which- as we posted yesterday, the ECB President Mario Draghi is staying in Europe rather than attending the serious policy meetings taking place in America.

The thinking is that the ECB  is trying furiously to put together a plan to cap bond yields whilst placating the Germans.

Whether the ECB are able to achieve this before the upcoming meeting is still up in the air.

The market certainly hopes so, but the complex issues of conditionality (what Spain and Italy will need to agree to) and whether private investors get shunted down the pecking order if the ECB steps in, need to be ironed out.

They will both take time, suggesting it may be October before the ECB can act.

How would the markets take a double dose of disappointment?

FED Bernanke hints on further financial stimulus

The euro fell a cent against the US Dollar during UK trading yesterday but managed to reverse its losses following Ben Bernanke’s testimony to congress yesterday.  FED Bernanke hints on further financial stimulusInitially the market was disappointed as Bernanke refrained from mentioning further stimulus directly.

However the overriding sentiment was that the economy remains very weak and stimulus remains very much on the cards- the door is still open.

This sentiment helped the US Dollar to weaken off and confidence to pick up with the S&P closing up 0.7% after falling off 1.2%.

The EUR/USD also bounced just under a cent reversing the earlier dip; Asian currencies and the AUD also posted gains on the increased appetite for risk.

Yesterday we witnessed a significant fall in the value of the euro through UK trading as the markets turned nervous ahead of the German vote tomorrow on aid to recapitalize Spanish banks.

Angela Merkel is talking tough and has stated that she will get “the majority she needs” and she better hope so.

If she fails to get a majority we can expect to see a sharp fallout in confidence; the market is already nervous and does not see a majority as a foregone conclusion.

Spanish banks need as much as €100 billion euros and with confidence in the Spanish banking system at very low levels a smooth process of recapitalization is a must.

US’s FED maintains fiscal stance

Ben Bernanke head of the US Federal Reserve predictably kept policy on hold whilst reducing forecasts for unemployment and raising expectations for higher near term inflation. US's FED maintains fiscal stanceThe US economy is still expected to grow at a ‘moderate’ pace in coming quarters, with the bulk of Fed members predicting the first tightening in 2014 or beyond.

The one concession to markets was the fact that the Fed is ready to do further in terms of policy development if required.

This helped to boost risk assets overnight leaving the Greenback on the back foot.

Headline releases are thin on the ground today leaving markets to consolidate gains in a relatively ‘risk on’ environment.

Sterling came plummeting down from its summit following yesterday’s news that the UK economy entered a technical recession after GDP unexpectedly contracted by 0.2% in the first quarter of the year.

Nevertheless, the fall was short lived, with Cable improving from its losses, helped by a superb reading for UK Nationwide consumer confidence in March.

However, Nationwide cautioned that the spring in confidence may be brief and therefore cautious of reading too much into this.

Sterling gains against the euro look as though they have reached its limit.

Finally, there was no adjustment in policy from the Royal Bank of New Zealand as expected, with policy rates on hold at 2.5%.

However, governor Bollard did endeavour to talk the kiwi lower while stressing worries about the international outlook.

Concerns about kiwi strength will raise the spirit of FX interference though it may also mean a delay in rate hikes.

The announcement was fairly encouraging on the domestic outlook too.

Even though rates are ‘appropriate’ according to the RBNZ there is a good chance of a rate hike in Q3.

The NZD ignored Bollard’s comments, firming on the back of improved risk appetite.

Bernanke moves the money markets

Yesterdays appealing comments by Fed Chairman Bernanke, in addition to better than expected results for German IFO business confidence last month, have boosted risk assets whilst weakening the Greenback against Sterling and the euro. Bernanke moves the money marketsMarkets appear to have shaken off, at least for now, growth worries stemming from weaker manufacturing confidence surveys in China and Europe last week.

The S&P 500 climbed 1.4% to 1,416.51, its highest close since May 2008.

The Dow Jones rose 1.2%, while the Nasdaq gained 1.8% to close at 3,122.57, its best finish since November 2000.

Ben Bernanke continued his stance that supportive monetary policy is still necessary particularly given worries about the jobs market and additional QE may still be needed.

Today markets will focus on US and French consumer confidence coupled with bill auctions in Spain and Italy. US consumer confidence is likely to slip slightly while the bill auctions are likely to be well received.

Sterling has failed to maintain gains above 1.59 against the Greenback over recent weeks let alone manage to test the key psychologically level of 1.60.

Therefore the current move above 1.59 could be a short one.

For the break above it will require an improved downtrend in the Greenback motivated by a sharp enhancement in risk appetite and/or a drop in US bond yields for Sterling to move much higher.

Both are unlikely.

Sterling will be susceptible to a general stronger Dollar for the rest of this year but could outperform against the euro.

Wise money markets becalmed in post greek seas

Following an indifferent Asia trading session overnight where Japan kept interest rates at 0.1%, the market now awaits key data from the Europe and the US to drive sentiment for the rest of the week.Wise money markets becalmed in post greek seasThe Greek debt swap deal has certainly added to this lack of direction providing little motivation to the markets yesterday.

The deal that amounted to a swap of £149 billion worth of bonds for a mix of new instruments ranging in maturity from 11 to 30 years had a relatively low uptake leading to bond yields from 14-19 %, the highest in Europe.

It appears the market is sceptical about this latest attempt by the Greeks to fend off their inevitable default and thus is looking for higher yields over shorter periods.

The euro continues its resilience at currently trades at 1.3142 against the Dollar.

Elsewhere in Europe today we have the German ZEW survey where we get an insight into medium term forecasts about Germany’s finances.

Over to the US and the Greenback should not be concerned by tonight’s FOMC meeting.

We may see the Dollar rally if Fed Chairman Bernanke is slightly more positive in his statement with further support from increasing theories that the Fed will begin on some form of sterilised QE shortly.

This coupled with expected stronger retail sales and positive National Federation of Independent Business (NFIB) report of small business bodes well for the US recovery and for President Obama in an election year.

Finally the UK Job market may be “turning the corner” according to a survey completed by recruitment firm Manpower.

The news comes ahead of the latest data tomorrow which are expected to show a further rise in unemployment.

Positive sentiment can now be found around the country in the East Midlands, North West and particularly London due to the Olympics.

Today Sterling is slightly firmer against the Euro and the Dollar trading at 1.1917 and 1.5667 respectively.

FED chief springs no surprises

We got no blockbusting policy from Jackson Hole on Friday, but the Fed chairman failed to rule out further action if the US economic outlook continues to deteriorate.FED chief springs no surprisesThe markets were probably wanting something more concrete, but Uncle Ben did deliver the one thing guaranteed to lift equity markets – hope.

He talked about fiscal policy, probably paving the way for President Obama to announce stimulus measures in a speech on Sept 5th he also sounded reasonably positive on the economic recovery, which may or may not turn out to be ill judged given we have an important non-farm payroll number coming up this Friday.

Other US data of note this week include the minutes from the last FOMC meeting on the 9th August and consumer confidence, both due this afternoon.

Given the importance of Friday’s speech it is unlikely that we get anything unexpected in the Fed minutes.

Sterling should take a bit of back seat this week, it has been stuck in trading ranges against both the Dollar and Euro in recent weeks and with a lack of any substantive data due this week we can expect that to continue.

The little data that is due this week is mostly housing related and includes mortgage approvals and the Nationwide house price survey along with net consumer credit, manufacturing and construction PMI later in the week.

The Euro has started the week on a roll, gaining against both the Dollar and Sterling even without any real data to back up the rally.

The merger between two of the struggling Greek banks seems to have lifted market sentiment, but quite how two bad banks makes one good one is beyond logic!

Wise Money still eyes Bernanke’s views

It’s all about Jackson Hole and ahead of today meeting the US Dollar index is likely to maintain its place in towards the middle end of its recent 73.47 – 75.12 range helped by weaker equity markets.Wise Money still eyes Bernanke's viewsExpectations or hopes that Fed Chairman Bernanke will announce or at least hint at a fresh round of quantitative easing have receded allowing the US Dollar to escape further pressure.

Bernanke will likely keep all options open but there are still some in the FOMC who do not want to embark on QE3.

Although the US Dollar may be saved from a further drubbing the commitment to maintain exceptionally accommodative monetary policy through Q2 2013 has contributed to a relative reduction in US bond yields and in turn is acting to restrain the US currency.

A likely revision lower to US Q2 GDP will not help the USD in this respect.

One currency in particular that is reactive to yield differentials is USD/JPY, which registers an impressively high correlation with US – Japan yield differentials.

Attempts this week by the Japanese authorities to encourage capital outflows and a downgrade of Japan’s credit ratings by Moody’s have done little to weaken the JPY.

Even the usually bearish JPY Japanese margin traders have been scaling back their long USD/JPY positions over recent weeks while speculative investors remain overly long (well above the three-month average) JPY according to IMM data. The risk of a shake out of long JPY positions is high but unless yield differentials reverse renewed JPY weakening looks unlikely in the short-term.

So far this week euro has shown impressive resilience despite weak data in the form the German August IFO business and ZEW investor confidence surveys.

However, there is a risk of euro weakness should Bernanke not hint at QE3, with the currency already trading around the bottom of its multi-day range.