I’ve resumed my work after some time off where there’s been plenty of housekeeping.
I hope you find this new edition of value. I’ve called it ‘The Daily Edge’.
I really try to go as in depth as I possibly can to assist traders. I look at the latest fundamentals (trend and discounting events), risk sentiment via my prop risk-weighted index, options (im/otm, imp/hist), correlations/value, volumes, cycles, looking at high-value areas in the charts, bank research…
As the Brexit echo reverberates incessantly this week, the British Pound has proven to be the obvious casualty of the political mess the UK finds itself in, as UK PM May faces her toughest hours yet amid calls for a leadership challenge.
The USD continues to rise victorious, although with a big caveat, and that is, I can’t envision these gains to be sustained as the macro outlook stance.
Can the US Dollar appreciate further near term? With the finding of a 2nd bullish leg intraday against the likes of the Euro, the Pound, the Yen, one could expect the ongoing buy-side campaign to continue maturing into a 3rd final leg before a reversal. In today’s report, I make the case why the breakout of the triangle pattern in the DXY should be taken with a bucket of salt.
Meanwhile, backed up by the preponderance of evidence via the options and inter-market analysis, I also find tentative signs that suggest to me that a recovery in the risk profile may see further legs develop short-term ahead of the ECB policy meeting outcome on Thursday.
In the bonus insights, I make a case to be a buyer of CAD/JPY today. Have a look as I see a significant number of stars aligning for further upside potential.
What about today’s tweet shout out? After reading his feed, can’t imagine you being disappointed with the selection I made. Goes by the handle @OddStats & lets numbers do the talk with real gems day in, day out.
The ECB meeting is out of the way. We’ve gained further clarity on several fronts. Arguably, the most critical is that Draghi has logically caved in by downgrading both growth and inflation, even if transitory effects are still the culprits behind the CB reasoning, hence, keeping the Euro downside limited.
Also, Draghi may potentially be setting up the stage for a push further out on forward-guidance, based on the wording used in his press conference, especially when he mentioned that ‘the balance of risks is moving to the downside’. Does that mean no rate hikes til Q4 2019? We shall see based on…
… the word of the day, “DATA DEPENDENCY”!
… and the one I’ve picked for today’s title as it does embody the lay of the land like no other in the low vol FX market. We are going through a ‘cul-de-sac’ road with the majority of central banks in standby mode, awaiting fresh signals via economic indicators. However, is not only the ECB, but the rest of Central Banks are also, too, keeping all the options on the table. Wherever you look at, it’s the same picture (ECB, Fed, BoE, BoC, BoJ, RBA, RBNZ…), they are all awaiting further data to determine the next moves in policy.
I like how Carsten Brzeski, Chief Economist at ING Germany puts it in his latest thoughts, noting that “the ECB has stopped the autopilot and has returned to monetary policy by sight.”
Hopefully, and judging by the significant increase in 1-week impl vol (read options section), the market is now betting that next week’s FOMC will be a lively event, even if it just means short spurs of volatility but with potential substance to threaten the confined late ’18 ranges in G4 FX vs USD. The Fed, as the yield curve stands, is arguably the Central Bank facing the highest stakes to properly communicate its forward guidance heading into 2019. Dot plot projections will be key.
Back to where it matters, which is today’s key takeaways from scanning the markets. By now, I’ve probably reiterated enough times my overall bullish stance on buying cheap EUR/USD. If not, check out my latest ruinations through yesterday’s YT video, where I touch on all the aspects.
As Head of Market Research at Global Prime with over a decade of experience in capital markets, I focus on providing expert market analysis from a technical and fundamental standpoint to Global Prime’s global clients and media outlets, with currencies the area of most expertise and dedication.
My views on the FX market are insightful and actionable, connecting the dots to interpret market dynamics and uncover opportunities. I dive into monetary and fiscal policies, economic data, geopolitics & macro fundamentals. My role also includes oversight of Global Prime’s brand reach globally.
The lay of the land in the US equity space went from bad to worse on Monday, as the S&P 500 imploded by falling over 2% and in the process, the old Nov-Dec range is now being stared from the rear mirror. As per the US Dollar, it finally saw an intraday move in alignment with its expensive macro valuation, and rather than appreciating in a treacherous risk aversion context, it followed equities lower in locksteps as the rush to go ‘cash’ accelerated.
There was an absence of fresh macro drivers. Even if we had had a clear catalyst, that focus would soon be fading as on the back of everyone’s mind is this week’s FOMC meeting, which is going to set out the outlook for monetary policy heading into 2019. Will the Fed err on the side of caution by sounding more dovish? Judging by imp vols, it’s going to be a wild ride…
Looking at Monday’s data, it was a bitter/sweet day for the likes of European fundamentals, as the final EU CPI reading undershot below the ECB mandate of 2% by a small margin (1.9% in Nov), while the imports/exports activity out of the Eurozone offered signs of optimism as strong activity continues. The reading raises the risk of retaliation by the US Trump administration, who won’t be too delighted on the widening EU-US trade surplus. Meanwhile, fundamentals out of the US were simply bitter (housing, manufacturing).
Today, all eyes will be fixated in the German IFO. Remember, fundamentals out of Europe matter more than ever, as the ECB has shifted from expansionary auto-pilot policies into a more data-dependent stance.
Brace yourself for what looks set to be another bumpy ride as it looks like the S&P 500 may find fresh selling. When factoring in the spike in option ‘Put’ premiums in the benchmark index, the increase in sell-side volume + open interest, or a VIX borderline of 25.00, these are all indications that warrant a high degree of prudence as the picture is really ugly out there.
In this type of environment, the likes of the Japanese Yen (25 delta RR higher) and gold are set to benefit. The Euro performance will be subject, in part, to the release of the German IFO, even if judging by the high interest to buy low delta options at the extremes of the range, impl vol, and the CoT, all suggest the pair should continue to exhibit a rotational profile. Watch any potential breakout in EUR/JPY as it may lead to a directional acceleration.
Lastly, today’s shout out goes to Miad Kasravi, who goes by the handle @ZFXtrading in Twitter. Miad is the Founder of www.speculatorstrading.com. I discovered him back in August. He is an active commentator on the #fintwit community and someone you should follow.
In the last 24h, the intensity of the US Dollar sell-off gathered further steam. This dynamic indicates that the market is not placing too high its hopes on the Fed. In fact, the behavior in the US Dollar leading up to today’s FOMC event communicates the market is betting for an uber-dovish rate hike. In other words, the FOMC may still raise its interest rate one more time, although it will probably set the bar much higher to keep the tightening campaign going.
If they opt for the dovish hike, it won’t necessarily look like a Central Bank compromised by the recent tweets of Trump, but rather, acting in a way that helps to ease the further tightening of financial conditions, a dynamic that has only worsened via higher funding costs/lower liquidity in the system. The flattening of the US yield curve also communicates the Central Bank is getting ahead of itself. These developments disincentivize the Fed to keep its aggressive rate hike rhetoric, so they’d be less compelled and keep the powder dry, even if they will continue to highlight, especially via such a pragmatist as Fed’ Powell is, that the Central Bank will remain data-dependent.
One of the most pressing issues to address in today’s FOMC meeting includes the update of the dot plot rate forecasts, as well as potential upcoming revisions to the Fed’s balance sheet normalization process.
The only way to explain the changes in option premiums heading into the event is by accepting as true that the market’s view — as a hint — is that expectations for rate hikes heading into 2019 may be nullified as the eurodollar futures market or the US yield curve indicate. Similarly, we might see a Fed shifting the narrative towards an adjustment in its balance sheet normalization process too. Only under these dovish circumstances or similar in USD downside impact I can justify the change in options pricing.
Let’s now get into the details. What I’ve learned from today’s cross-asset analysis, judging by the variations in the pricing of options, is that the consensual view via US treasuries and equities substantiates the notion that the Fed may be working to engineer some type of circuit breaker in the soulless stock market. Even if the pricing to own puts in the E-mini S&P 500 is still much more expensive, the major reduction in premium cannot be ignored and tells us that the market is less bearish in equities heading into the event.
Just as it cannot be ignored the higher prices to own calls in US treasuries, jumping by over 100% from its previous 25-delta RRs. Throw into the mix the decrease of over 0.5bp in 25-delta risk reversals in the USD/JPY, and it looks like the US Dollar is poised to suffer further downside pressures. However, it may not be a broad-based move, as commodity currencies still remain largely unfavoured, not just in its spot technicals, but via the pricing of options.
That’s what options traders are telling us. They certainly have taken note, as bond traders did via the flattening of the US curve, that trade tensions, the fading of the fiscal ‘sugar rush’, the US twin deficits, weakness in the housing market, the slow down in investment growth, the late business cycle, Powell’s shift in narrative from a long way from neutral (October 3rd) to rates being “just below” estimates of neutral policy (November 28th), when compounded, place the risks of a more relaxed Fed into 2019, outweighing the pros.
In today’s report, I’ve also noted additional downside protection bought — via OTM puts — in the EUR/USD this week. I’ve recently been endorsing and playing EURs from the long side, as I explain in the video below.
A market that I find very interesting to endorse in buy-side action if the view by options traders materializes is gold. Vol is going to pick up substantially, and while some pairs such as the EUR/USD, AUD/USD, judging by its implied vols, may still be contained in wider yet familiar ranges, gold appears to be an exception, along with the EUR/JPY, amid a low gamma-scalping context.
All in all, brace yourself for a wild ride, in what’s set to be one of the major events of the entire year. It will set into motion the stage to approach 2019 with from a point of greater clarity to diversify one’s portfolio.
The State of Affairs in Financial Markets — Jan 29
The narrative in financial markets is quickly evolving from a state of relative stability on lingering positives from an anticipated deal between the US and China on trade, towards the cruel reality of the cyclical macro risk-off trend established in US equities since last year. The disappointing earnings by Caterpillar and Nvidia, the former seen as a bellwether of the global industrial sector, comes to show that US companies were not immune to the Chinese trade tariffs.
Not only we see G10 economies, with the US the maximum expression, suffering from late economic and business cycles, but the Sino-US trade war has exacerbated, if anything, the underlying weakening trends in economies such as the European Union, the United States, and especially in China, with the domino effect expanding elsewhere. I focus on these three countries in particular as they account for most of the globally generated growth.
The temporary re-opening of the US government after a record-long shutdown should really be perceived as a short-term risk removal but far from acting as a catalyst to influence market movements for a protracted period of time, as clearly seen by the price action in equities on Monday.
The concurrent negative outlook in China by heavyweights such as Caterpillar, NVIDIA, Apple, and the list goes on, is the byproduct of an economy that is walking a tightrope with clear symptoms of a slowdown. There is an excessive reliance towards China, which is no surprise as the country has single-handedly orchestrated over ½ the global growth in the last decade.
In FX, the USD continues to trade on the backfoot after an off the cuff massive sell-off last Friday, in which no single driver could be attributed. The Aussie and the Kiwi have been well supported in light of the weakness seen in the US Dollar. One currency that remains relatively cheap if risk-off were to pick up further is the Japanese Yen, which has corrected a decent portion of its Dec-Jan rally. Wherever equities go, the Yen crosses will most likely follow. The CAD traded offered as Oil came under pressure.
It was a low key affair in the Forex arena ahead of the Federal Reserve monetary policy meeting, where all the attention will orbit around the Central Bank’s position on its balance sheet. But first things first, as the only currency exhibiting signs of life late on the day on Tuesday, courtesy of the Brexit amendments votes in the UK parliament, was the British Pound.
Today’s debate and votes on Brexit by UK MPs was about finding a more consensual way forward while getting a pulse of the desire by the government to avoid a ‘No-Deal’ Brexit. After all said and done, it very much played out as one would have expected, with amendments related to creating a safety net that the UK won’t leave the EU without a deal finding enough approval. However, judging by the late sell-off in the Pound, the narrative in today’s GBP playbook was all about getting the maximum guarantee that the UK will avoid a hard Brexit, so the fact that votes by MPs Cooper-Boles on blocking a hard Brexit failed, it’s a testament that any re-emergence of the dreaded word ‘hard Brexit’ as even a remote possibility spooks markets and the Pound, as a result, expressed those fears. Throwing cold water, the EU has reiterated that the withdrawal deal and the Irish backstop won’t be re-negotiated.
Find below a table put together by Morgan Stanley listing the different proposers during Tuesday’s amendment votes alongside a summary of what went for a vote. I also include a timeline.
The overarching theme dominating moves in financial markets is the dovish signal sent by the Fed on Wednesday, further acknowledging that rate hikes are no longer top of the list, with patience being reiterated, while also making the admission that a potential review of the balance sheet normalization guidance. The Fed has gone full circle from constructively hawkish just a few months to an undeniably dovish stance. When we look back years from now, the sequence of events that unfolded since the aggressive tightening of financial conditions in the US would be an excellent case study on how market forces, ultimately, will determine the course of action by a Central Bank.
In light of the dovish admissions by the Fed, the US Dollar was absolutely smashed across the board as the DXY clearly shows in the chart below. Be mindful, this event has fundamental ramifications one can build upon to stay USD bearish for the near term. If you check the ratios of implied vs historical vols currently at play, we are faced with a market with a directional market profile in nature, which is the best environment for momentum strategies to thrive, when breaks occur. The sellers of puts must hedge their risk by selling breakouts and vice versa, hence limited gamma scalping.
Risk assets also thrived in response to the Fed’s message, with the S&P 500 as the bellwether of US equities catching a strong bid, and most importantly, akin to the bearish moves in the USD, found acceptance near the highs of the day. The upbeat in earnings by tech giant Apple yesterday, alongside the better results by Boeing, were underpinning factors for equities right off the bat, with the Fed being the accelerant. The dynamics have now re-anchored to an environment characterized by USD weakness across the board in a context of risk appetite. The 5-dma slope and cycles both point in the same direction, which means, the safest bet is to swim in the direction of the ‘risk-on’ currents.
The overarching theme this week is the dovish turnaround by the FOMC on Wednesday, which has obviously had major knock-on effects in the psyche of the market. To start off, as I show in today’s report, the bear steepener dynamics in the US yield curve is a hint that the market is now pricing in a rate cut as the next move by the Fed, even if far from an immediate outcome.
In the last 24h, the Euro has come under renewed pressure as headlines from ECB’s Weidmann warned us that the German GDP will probably dip well below the 1.5% mark. We had already learned via the German government that they had revised its yearly GDP forecast to ~1%, still, the Euro found a wave of selling-pressure to pare most of its FOMC-induced gains. It’s hard to fathom EUR upside as a function of the merits in the EU economy.
Another major story markets are tracking very closely, even if there are no signs of an immediate resolution, is the US-China trade talks. Pencil in this data folk, March 1st, that’s when the punitive increase of 25% in tariffs to China comes into effect. Since the US aims for a meticulously comprehensive deal with high guarantees of commitment by the Chinese, this is probably a story to still drag on for weeks. Nonetheless, US President Trump said talks are “going well” but a meeting Trump-Xi will still be required.
The next focal points shift towards the European flash CPI data, the US non-farm payrolls, and the US ISM manufacturing PMI. In terms of US data, given the prolonged US shutdown during the month of January, the bar has been set fairly low for today’s figures. If the changes in the 25-delta risk reversals in the options market are any indication, the market suspects a poor showing.
Just be aware, the jobs market is no longer the number 1 driver of Fed policies, so any NFP-led vol should be taken with a bucket of salt, especially in a bear steepener US yield curve. In other words, there are heightened risks of fading a positive read given the macro reset since the FOMC dovish shocker.
The massive headline beat in last Friday’s US NFP led to solid flows into the USD as theUS fixed income enters a micro bear steepener phase -improved outlook -. One can notice the low rate of change in the average hourly earnings to 0.1% vs 0.3 exp MoM (bad). The unemployment and underemployment rate also rose as participation climbed. As I mentioned last Friday, “the US jobs market is no longer the number 1 driver of Fed policies, the stabilization of the stock market is, hence any NFP-led vol should be taken with a bucket of salt, especially in a macro bear steepener US yield curve.” Raoul Pal, Founder at Realvision, also nails it by noting that the Dec US NFP is a lagging indicator to take the real pulse of the economy, as the chart below shows, with a lag over ISM of up to 4 months.
Disappointing UK data (Services PMI misses by 1 bp) alongside no clarity in the Brexit front, keep the Sterling offered outright throughout Tuesday. UK PM Theresa May is scheduled to meet EC President Juncker on Thursday with very low expectations for a real breakthrough. Fears are on the rise that an election or UK PM May resignation may be on the horizon as the Brexit deadline approaches with the UK in need for more time that they simply don’t have.
US equities keep extending gains for the 5th day in a row, with the Nasdaq Composite the outperformer, accumulating near to 20% gains since the bottom in late December. In an even stronger fashion, European equities found strong demand, with earnings backing the moves.
USD navigates Tuesday’s seas with surprising firmness despite the notable decline in US government bond yields and a poor US Non-Manuf ISM print (56.7 vs 57.1), in which new export orders was the main laggard amid a global slowdown in trade activity.
The AUD was the main mover on Tuesday, alongside the GBP, after the RBA kept its rates unchanged at 1.5% in what appears to be a rather complacent approach given the mounting evidence of headwinds into the real economy. Tuesday’s Aus retail sales (-0.4%) was yet again another disastrous read not boding well for the Australian economy. The spike in the Aussie came mainly in response to a squeeze in short positions after the RBA failed to blink.
UPDATE: RBA’s Lowe has changed that today.
Headlines around the US-China trade negotiations have logically slowed down as China celebrates its golden week (new year). But there is no time to waste for the US, and a US Treasury report in Congress states that it intends to ‘hold China accountable’ for unfair, market-distorting trade practices, which sounds like a dampener on building positive vibes.
The US Dollar has been catapulted to new highs for the month, even if the reinvigorated rally is far from enjoying a positive backdrop if we look at US government yields. The micro and macro flows through US fixed income portray a much uglier picture not backing the USD strength story.
It is clear that the market has temporarily decoupled from treating the US Dollar (DXY) as a by-product of a country’s attractiveness, or lack thereof, towards its deteriorating sovereign bond yields. As I mention in twitter today:
If you pay attention to the latest movements in G6 FX bond yields, you will notice that there is just simply no better place to hide fundamentally speaking, which may help to understand why the latest dynamics in currency flows keep supporting the US Dollar even as US yields drop and equities hold steady.
The equity market has finally shown some credible technical cracks, and since the pendulum was already in a transition from ‘risk-on’ dynamics into cloudier terrains, that’s all it took for the likes of the Japanese Yen and the US Dollar to keep its dominance.
The rise in the US Dollar portrays a disturbing theme, that is, there is ample demand for the currency in part as a function of the very limited alternatives to diversify one’s currency portfolios. That’s one way to rationalize how the US Dollar keeps strengthening amid the constant bleeding in US yields.
The yield curve trends in developed economies are absolutely terrible. It essentially communicates that in the grand scheme of things, there is a firm conviction that the slowdown in China and the ongoing deceleration in US growth is spreading out to affect the outlook for growth and interest rates in major economies. It’s been a busy week for the RBA, with horrible ramification for the Aussie, as the Central Bank finally coming to grips with the new reality in the Australian economy.
The script, ever since the De Fed Put (hint at ending QT) has followed its course, with the ECB next to cave in by acknowledging its poor outlook, and this week, it’s been the turn of the RBA. On the background, you also have the PBOC injecting aggressive amounts of liquidity into the system.
There are 2 key drivers keeping markets afloat this year. One is the prognosis that excessive liquidity will ultimately be maintained into the system, while in parallel, the US and China must keep the hopes high that a trade deal will ultimately come to fruition.
The gravitation towards risk aversion on Thursday harbingers that the market is assigning way more question marks to an eventual trade deal than previously anticipated. Reports that Trump won’t meet Xi ahead of the March 1st tariff increase deadline has definitely moved the needle. It’s far from being baked in the cake and that’s translated in the behavior of financial markets.
The ‘risk-off’ regime we’ve gradually transitioned into since mid last week still remains in place, with some minor signs of abating via equities not yet providing enough technical evidence to shift the focus back to bid risk. Unless the equity bounce is backed by yield curves or a significantly weaker DXY, I wouldn’t read too much into the late US equity rally as to single-handedly be able to revert the fortunes of what’s an otherwise still cloudy outlook.
In today’s write-up, I argue in favor of a potential continuation of the JPY strength against selected currencies such as the EUR or the AUD. Similarly, amid this environment, commodities such as Oil should go through a hard time. If global equities resume the rollover, it will take us back into micro-macro ‘risk-off’ flows back in alignment, likely to support USD, JPY, Gold.
Markets have temporarily stripped out the gloomy macro outlook of decelerating growth and low inflation as G10 yield curves demonstrate, to instead revert back to positive microflows. It may last hours or days, but what’s clear is that there is still a major divergence between the macro risk profile, one that still keeps the pendulum on the caution side, while the short-term is more optimistic as US official continue to sound rather upbeat about an eventual US-China trade deal.
The USD dominance is undeniable, and even if the trend looks over-stretched, the price action seen does not provide any evidence that the bullish USD tide is receding. Flows keep favoring downward pressure in GBP/USD, AUD/USD, upside strength in USD/JPY, USD/CAD while Yen crosses should continue to have a hard time until the microflows re-align with the macro ‘weak risk-off’.
Anyway you slice it, the short term conditions in financial markets have fully transitioned into a blossoming state, with the environment characterized by ‘true risk-on’ as depicted by the surge in US equities coupled with further supply in US bonds (higher yields). To top it off, the USD has finally caved in to the ebullient mood by finding a wave of selling pressure, which makes the short-term context one of full-blown risk appetite mood.
From a longer-term perspective, using the 5-DMA as a reference, further adjustments in structures must still eventuate before we can synchronize microflows with the macrostructure. A clear reminder of how fragile the macro outlook still looks, even if less so than 24h ago, is the prolonged bull flattening yield curves in developed countries. Near term, a tentative recovery is in the making as risk recovers and with it, the short-term formations of bear-steepeners, which translates into the prospects of an improved growth outlook down the road as long-dated yields rise faster than short-dated.
What this means in FX is that the short-term flows do suggest a more constructive outlook towards beta currencies the likes of the Aussie, Canadian Dollar, Kiwi (overstretched today). The JPY should continue to struggle in finding much demand amid the current dynamics in place. In this intersection, one can imagine that Oil prices will fare fairly well. The Euro looks technically better positioned than its been for the last 2 weeks to eke out further gains after a sizeable bullish outside day, while the Sterling is the only “?” failing to capitalize on USD weakness due to the Brexit uncertainties.
The narrative continues to be dominated by optimism around the US-China trade talks. At the same time, the divergence in US stocks (soaring) and long-dated global yields (depressed) is hard to be justified on the basis of ‘rainbows’ in the US-China trade discussions alone. One must also assume that the market is pricing quite aggressively the chances that Central Banks — the ECB, the Fed, and the PBOC — , will keep base money (QE) at very ample levels. The market is essentially giving the benefit of the doubt to the favorable resolution of two critical macro issues. Firstly, the US-China trade talks will ultimately yield a breakthrough that enhances the outlook for global growth into Q2 ’19. Secondly, the brief period of QT (Quantitative Tightening) is coming to an abrupt end. Central Banks are literally trapped in a QE vicious cycle. Pull this liquidity out of the system, and the ramification for financial conditions are more disastrous than the US, EU, China can bear. The current backdrop of rising equities and a falling US Dollar (microflows related for now) has allowed the likes of the beta currencies (NZD, CAD, AUD) to fare way better, with the outlook favorable as the intermarket flows stand. The outlook for the EUR, GBP has also improved, but unlike beta FX, these two currencies face a harder road ahead to sustain and/or extend much further its gains.
The absence of liquidity in financial markets during Monday is well expressed through the pair’s narrow 35p range. The most traded pair in the forex universe has validated the first up-cycle structure for weeks, even if from a 4h chart and above, it would still warrant caution as the structure is still a wide a 1 cent range between 1.1340–50 down to 1.1250 with 1.13 the anchoring midpoint to pivot from. At the moment, with back-to-back hourly rejections off this round number and a 25-HMA still exhibiting an upward slope, one could make the case for active interest to buy on dips as the hourly cycle pans out. In terms of intermarket flows, there is an absence of cues to be obtained from yield spreads or even the German yield as a proxy for the EU growth outlook as the moves have been extraordinarily stagnant in the last 24h. Even the 5-day correlation coefficients both show an evident detachment between the performance of yields and the EUR/USD price action, which results in a market that is temporarily technically-driven.
The USD continues to trade on the back foot as reports emerge that US trade negotiators aim to target a more stable Yuan as part of the comprehensive trade deal being negotiated. A firmer Yuan is a risk positive event for the likes of EM (emerging markets) and beta currencies (AUD).
Renewed hopes of a benign Brexit resolution kept the GBP well bid across the board. Tuesday’s GBP spike appears to have been triggered by headlines from a government minister (Harrington) stating that if May cannot pass a deal, then the parliament will take control, adding a no-deal Brexit not envisioned. UK PM May is scheduled to meet EC President Juncker on Wednesday, so be prepared for further headlines with intraday spikes in vol.
US equities ended building on top of its recent gains with an upbeat earnings report by the retail giant Walmart re-igniting the ebullient mood from the open of business in NY. On the contrary, European equities ended mostly lower as the threat of car tariffs by the US persists.
Fed’s Mester went on a feast of headlines, of which the admission that the Fed should announce balance sheet plans well in advance was the most relevant, further adding she doesn’t see the need to taper the balance sheet runoff before halting it (risk positive).
Germany’s Feb ZEW survey current situation remains on a continuous slump, falling to 15.00 vs 20.00 expected, marking the lowest reading since Dec 2014. The ZEW institute sounded quite cautious, noting they don’t expect a ‘rapid recovery’ of the weakening trend.
BoJ’s uber-dovish Mr. Kuroda said the Central Bank will mull further easing if deemed necessary in cases such as perception of slowing economy or weaker price trends.
Out of the recent RBA minutes, the key takeaway was the uncertainty surrounding household consumption as the housing crisis continues. The board continues to sound fairly vague and non-committal on the next rate direction, even if the tone has been skewed towards the dovish side. In the minutes, they noted the RBA ‘saw scenarios for hikes or lower rates’.
UK wage inflation keeps growing at the fastest pace in a decade while employment figures remain strong with a jobless rate of 4%, which is the lowest since 1970.
The macro backdrop remains unaltered (USD negative) even if the outcome of the FOMC minutes has served well to the world’s reserve currency in finding positive short-term flows. There were two key messages by the Fed in its minutes, the one that reinforces the notion that the balance sheet runoff will most likely come to an abrupt halt sooner rather than later (risk positive). QE to infinity anyone? The other has to do with tentative signs that the Fed might not be done yet with tightening monetary policy, or at least that’s what they seem to suggest by noting that ‘if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as patient and might then use a different language’. In layman’s terms, the Fed still retains a vague tightening bias. That’s precisely what gave the USD a much needed short-term impulse. Although as I elaborate in the charts below, the Yuan strength story is a bigger one to drive markets these days, hence why the recently established weak macro trend in the DXY still faces the prospects of finding further legs down. Remember, whatever I compile as info, should be taken with the framework in mind of being open to daily changes in rhetoric flows, that’s why I always emphasize that the most I can do is to provide the general bias made available via charts by the time markets close for business in NY.