Traders neutralised risk and USD positioning in US trade, although ultimately the comments from Atlanta Fed president Dennis Lockhart were the positive trigger. The non-voter said ‘any adjustment is not a major policy shift. The high level of accommodation will stay in place’. He also mentioned that the Fed is approaching a period in which a ‘reduction’ can be considered, although it wouldn’t be June. Still this reassurance is a snap-back to reality that curbing the pace of asset purchases is not the same as an actual increase in the Fed funds rate, and this saw the market rally into the close. It was also good to see emerging markets post a good session, showing investors are gaining confidence again.
Of course going into the Lockhart comments markets were not looking too flash following further commentary from San Francisco President John Williams who re-iterated his stance of an early end to QE, while the US manufacturing ISM can only be described as depressing. Sometimes when we get a poor headline print we can drill down and look for inspiration in the multiple sub-components, however, not this time, with every sub-component falling (and contracting), except employment. It’s therefore a moderate positive that manufacturing only makes up around 12% of GDP and we hope it is a temporary blip.
On Fed policy, after all we have heard from Fed speakers of late we still find the concept of bad news being good news for risk assets, which is as counterintuitive and quite painful. We know the Fed will curb the pace of buying after a number of months of solid data. Our base-case has been the December meeting for the Fed to announce a change in pace, so we know in the next 5-8 months it will hopefully happen; it has been priced in. Wouldn’t it be positive to see the trend of better data start now and show consistent progress, which in turn can put upside risks to growth and thus company earnings? Would this not be better than going through another slump, which in turn will see the Fed increase its QE programme, thus boosting stocks, which will mean we will probably have to go through this argument again in twelve months? It’s amazing that some would like the latter and the quicker the economy can fend for itself, the better in our view.
In US trade today Fed Governor Sarah Raskin, Kansas City Fed President Esther George (FOMC voter), and Dallas Fed President Richard Fisher (FOMC non-voter) will speak. Given the uber-hawkish stance of George and Fisher expect strong anti-QE language.
As said, there were some strong position adjustments in the forex market with AUD/USD rallying to 0.9792, while EUR/USD closed above the February downtrend and 38.2% retracement of the 1.3243 to 1.2797 around 1.3070. We had been expecting traders to go short around 1.3070, but it seems price action is quite constructive and the bears are not able to get any real traction. A close above 1.3100 would certainly be positive although the ECB will want to limit any real upside this week, potentially using the treat of negative deposit rates as the deterrent. Cable also looks quite good and has been another frustrating trade for the bears. Good construction PMI numbers today could see GBP/USD push towards 1.5350.
(Daily chart of EUR/USD)
Asia has not really shown any conviction from either the bulls or the bears, with Japan fluctuation between a positive and negative market, while Australia was held back for most of the day by its central banks meeting. China is down 1.4%.
The Japanese market hit a low of 13,060 in early trade, which put it two percentage points from a technical bear market, although has since had a strong rebound (now up 2.1%). USD/JPY as well has seen modest buyers, although has looked heavy pushing back into the 100.00 level. We felt yesterday that the lows could be on the cards soon, but we are waiting for the technicals to provide clarity here and a move above 101.16 would give us more confidence to look at more positive strategies. News that the Abe administration is urging the nation’s pension fund to upscale their investments into equities and overseas assets seems to be stemming the sell-off, and the rally in the Japanese market from key support today is also positive.
The ASX 200 was in a bit of holding pattern going into the RBA announcement, and that was always going to be the way given the possibility of an out-of-consensus cut. The fact that AUD/USD fell modestly after the statement (hitting a low of 0.9689 before rallying nicely above 0.9700) suggested the market saw something initially dovish in the language. However, the fact that the ten-year bond rallied a couple of basis points doesn’t marry up with this thought, neither does the fact the ASX fell six points either. For us, the RBA has left the door ajar for further easing, however it is firmly in ‘wait and see mood’ and probably feels content that the 200 basis points of easing are stimulating the right areas of the economy. It was a very short statement indeed, and didn’t take long for traders to read, but the outcome is a bank that is in no rush and seems quite content right now, but will cut if needed.
AUD/USD has been all over the place today, although has seen mild profit taking after the overnight rally to 0.9792. We felt the pair could push higher yesterday given the clear divergence seen on the daily RSIs and one-sided positioning in the market, and this has materialised. The current account deficit was slightly lower than expected at A$8.5 billion, while net exports as a percentage of GDP came out twenty basis points higher than forecast at 1.0%. The latter is a function of lower volumes of goods exported against a backdrop of stronger iron ore shipments, and how this plays into tomorrow’s Q1 GDP will be key as on any other day this would be good, however yesterday’s retail numbers and inventories could subtract.
Europe looks set for a positive open thanks largely to a strong close on the S&P 500 (post European cash close), although US futures have come off during Asian trade. Data is relatively light, with the US trade balance expected to widen in April and a miss to the $41.1 billion consensus could have ramifications on the final read of Q1 GDP (released June 26). Of course we need to also remember it’s Tuesday, and Tuesday in the US means positive markets. Recall the S&P 500 has had a positive day’s trade for the last twenty consecutive days; can it make it a twenty-first?