by Chris Weston
Asia came in today staring at the carnage that took place through late European and into US trade, with EUR/USD seemingly the trigger and USD/JPY (and Nikkei futures) at the epi-centre. The moves once again were reminiscent of the early days of the GFC, and were violent and breath-taking.
Mario Draghi, the master of communication, was expected to keep a lid on EUR/USD moves and talk down the currency using the threat of negative deposits as the reason to be cautious. However, in reality what we got was a message that the ECB President is pretty content with EUR/USD above 1.32, and probably will be until 1.3500 comes into play. The 1.2800 to 1.3200 range the pair has been trading in for the last few months has come under threat given yesterday’s high of 1.3306, however it all now depends on today’s US payrolls report. Mario Draghi showed a lack of concern about rising rates and the steepening yield curve, while also painting a mildly more optimistic picture on growth going forward. He did however keep the door open if necessary for a further cut to the refinancing rate, although the barriers now to a deposit cut are very high indeed, and would require a very bleak backdrop indeed to get that into play.
All-in-all the technicals on EUR/USD and on GBP/USD for that matter actually look quite compelling, although it’s worth highlighting that next Tuesday and Wednesday the German Constitutional Court meets to discuss the OMT (Outright Monetary Transaction – remember that?). While Mario Draghi felt (and we would certainly agree) that it has been one of the most effective policy tools deployed by a central bank in years, the German court will start debating whether the OMT is constitutional and a threat to financial stability. The announcement of this debate has previously caused traders to take risk off the table, however while we may get a few headlines coming out of the hearing, no decision will fully be made until September.
It promises to be another headwind for the EUR, DAX and other European bourses:
Asian markets were provided with a reasonable lead, with the S&P rallying hard into the close. However, what happens in the US and subsequently Asia is not as clear cut as it once was. Nikkei futures and USD/JPY fed off each other overnight, with systemic traders at the heart of it. The end result being a 95.91 and 12282 low print in USD/JPY and Nikkei (SGX) futures respectively. The futures coincidentally were the exact 50% retracement of the whole rally from the November low to the recent high. The Japanese cash market opened predictably lower, and despite comments from MoF member Tatsuo Yamasaki that the moves overnight in USD/JPY were too rapid and that the MoF was watching the forex market, the early support in the equities gave way as the day rolled on.
USD/JPY still feels sick, especially as it has broken into the daily cloud for the first time since October. One would think the chance of hard-hitting, perhaps even interventionist rhetoric has markedly increased for next week’s BoJ meeting. Interestingly, while we haven’t heard anything as yet, a reported speech by the Japanese health minister was due to detail medium term plans on changes to the public pension fund, while Prime Minster Abe’s ally Kozo Yamamoto said the JPY could weaken to ¥110.00 and that the BoJ should continue with current policy. All-in-all this saw traders cover with the index only closing down 0.2%.
The ASX 200 has followed Japan for most of the day, closing down 0.9%. It’s all been about resource names today, with the sector down 2.5%. Newcrest’s review of its 2014 business plan is a huge disappointment, and it seems the investment case behind the name is falling by the day, although many in the market are more concerned with the coincidence that five top-tier brokers downgraded the name a day or two before this downgrade. It seems Newcrest’s news is having ramifications on the sector, although there will be some who would be running a neutral book ahead of the US payrolls report, in case of a strong number that causes increased calls for QE tapering. China also releases its May data dump, and while Sunday sees retail sales, fixed asset investment, industrial production and CPI, we feel Saturday’s trade balance carries the bigger risk.
Recall that China’s State Administration for Foreign Exchange (SAFE) warned of a backlash against companies whose goods and capital flows did not match in April. The key trigger was the 57% jump in exports to Hong Kong in March, where on the other side the huge increase in Chinese exports was not reflected in Hong Kong’s port data. Therefore it will be interesting to see if this increased oversight has an impact on the export side of the trade balance equation, with economists currently expecting 7.4% growth in May.
European markets should see good gains on the open, however again this is function of the afternoon rally in the US. The fate of the markets for the rest of the day however is far from certain and we should learn a lot of the psychology of the market by the end of the US session. In European trade we get reads on industrial production in Germany and Spain, while we also see the monthly trade numbers out of the UK and Germany, while jobs numbers will be released in Canada. However, today is non-farm payrolls day foremost, and there is every chance we see another day of heightened volatility, with almost all asset classes likely to move to an ever-changing view on QE. The market’s consensus is 163,000 jobs created (range 290,000 to 80,000), however as we know this is a lottery and could print anywhere. A number in-line will probably support stocks and could see a slight bid in US treasuries; however the real interest comes in a number closer to 200,000 or 125,000. A strong print would probably see equities under pressure, with the US ten-year bond pushing back above 2.2% on tapering fears, which is perverse given good news, and should be good for stocks.
However, we are in a world which is transitioning from stimulus-led gains back to a fundamental-based focus, and this will be a bumpy and sometimes illogical ride.