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Fundamental Analysis 26.04.2018 – Market Outlook

Market Recap

USD had another up day – and EUR had another down day, the converse – as the 10-year US Treasury yield rose for the 7th straight session to another Year to Date (YTD) high of 3.03%. The yield is up 25 bps in 10 trading days. That’s twice as much as Bund yields rose over that time (12 bps). Furthermore, it’s significant that the S&P 500 managed to close with a modest gain today despite the further rise in rates. Back in February 2018, rising rates and in particular the fear of 3% 10-year yields were a killer for stocks. If US stocks and Treasury yields can both move higher, that would be a powerful magnet for a higher dollar as well.

AUD was the best performing currency overall and NZD the worst in a pattern that’s getting rather familiar recently. Given that there was a holiday in both countries yesterday, there was no local news behind the moves. The rise in AUD was attributed to local companies hedging rather than any fundamentals. In fact, AUD weakened slightly against USD; it just held up better than most other currencies, including EUR and JPY. The continuing weakness of NZD with no specific factors suggests that the market is expressing its (negative) view on the new Labour government and its change in the central bank’s mandate, that is, adding “maximising sustainable employment” to the Reserve Bank of New Zealand’s monetary policy targets.

Today’s market

The big event today will be of course the European Central Bank (ECB) meeting. No one expects a change in rates. The big question is what if anything they will say about the end of their bond purchasing program and perhaps any hints about when they might start moving interest rates afterwards.

Currently, their bond purchase program is scheduled to end at the end of December 2018. However, there are reasons for them to be somewhat cautious right now. For one, the economic indicators have been disappointing recently. The Citi economic indicator surprise index for the Eurozone is the lowest it’s been since the 2011 Eurozone debt crisis.

The Eurozone manufacturing Purchasing Managers Index (PMI) has declined for four months in a row, suggesting that we could be approaching an inflection point for the Eurozone economy.

Furthermore, inflation is not accelerating. On the contrary, core inflation hit a peak of 1.2% in July and August 2017, but has remained at 1.0% for the last three months. 

The problem for the ECB will be how to project confidence without sparking a market reaction that could send interest rates higher prematurely and thereby derail the fragile recovery. We can see them already grappling with this problem in recent comments from most (but not all) officials, who have generally taken a dovish tone. We are likely to hear comments about the risks being tilted to the downside, more talk about the dangers of a trade war for the global economy, and the importance of confidence.

Furthermore, although the ECB has given some guidance on the timing of the first rate hikes – no change expected until “well past” the end of the QE asset purchases – they’ve never given any clue about the pace of rate hikes once they start. Some ECB members have however started to address such issues in their recent comments.

Other indicators

The day starts with UK Finance mortgage lending. Loans are expected to continue to fall as they have basically ever since even before Brexit. Given the weakness in retail sales already in the UK, a further hit to the wealth effect will not be welcome (except of course to the 37% of the people in the UK who don’t own their own homes). This could be negative for GBP.

The US advance goods trade balance is expected to show a modest improvement in the trade deficit. On the contrary, the deficit is forecast to remain far wider than trend. The news could spark further cries about unfair trade and force Asian currencies higher. This could be negative for USD. 

US durable goods come in several different flavors, but the FX market seems to focus on the headline figure, so that’s the one I concentrate on. It’s expected to rise a bit less than in the previous month, but that month was a bounce back from a fairly steep decline. This months’ rise will also be boosted by higher airplane orders; the ex-transportation figure isn’t expected to be as strong, but the FX market doesn’t pay as much attention to it. In any event, another month of above-trend rise in orders should prove encouraging to investors. This could be positive for USD.

The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.
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