What a week we had for the financial markets. Some of the notable developments in the past week saw the euro-dollar pair surprisingly hit 1.2600 levels for the first time in a month, gold sold off more than $40 per troy ounce to break below 1,200 levels for the first time in three weeks and the crude shed more than 8.5 per cent in a single week to close just above $72 levels.
The USDJPY pair traded below 87 levels, hitting a low of 86.97 for the first time in over six months, and the AUDUSD sold off more than 3.5 per cent (0.0325 pts) in the week.
As for the macroeconomic news, which triggered such a bearish move, it was all about dampening global growth forecasts, starting from China.
On Tuesday, the New York-based Conference board announced that its Chinese leading economic index rose only 0.3 per cent in April, far lower than the 1.7 per cent gain reported in June.
Adding to the weakening sentiment and magnifying the erosion of risk appetite was China’s May PMI number, which came much weaker and showed a decrease to 53.9 (v 54.5 exp).
This news compounded to the already prevailing negative sentiment and risk markets took a further hit on the continued dampening investor mood. The flight to safe haven assets saw worldwide equities and commodity markets slump as risk-correlated currencies succumbed to the bearish overtones from the downward revised Chinese data.
With the path of the global economic recovery coming into question (triggered by an economy which has traditionally been seen as the engine room for the global growth recovery), safe havens such as the yen and Swiss franc were particularly stronger.
The weaker sentiment from China echoed stateside when last Tuesday’s US consumer confidence figure showed a decrease to 52.9 from an expected figure of 62.5. With the negative growth forecasts dominating the headlines, one would have expected to see the greenback gain against the EUR, which has been susceptible in the months gone by. But judging by the performance of the EURUSD from this past week, obviously this wasn’t the case.
Amid all the bad news, the euro closed a stellar 1.6 per cent higher than the US dollar. The ripping rally higher in EURUSD and a host of other EUR-crosses from this past week has had many market participants asking what on earth could have prompted such a reversal – and in the backdrop of yet another slump in global equity indices which has traditionally been the fuel for EUR-weakness.
A simple and easy scapegoat would be to point the finger at the often-treacherous trend-reversals effected by month-end and quarter-end flows – but undermining that explanation is the fact that the month end happened a day earlier.
Instead, a more realistic explanation of the euro’s rally would be a result of a long overdue cleansing of short positioning that has become more and more stifling as the bear trend has matured; and the trigger for that reversal coming now is simply the fact that the EUR has actually fared pretty well against some significant risk events of late.
In a week that’s seen the expiry of the ECB’s €12 million (Dh55m) liquidity operation, bond auctions in Spain and France, a German presidential election and Moody’s announcement that Spain’s credit rating is under review, EURUSD has not (as it once might have done) reacted with a withering retreat lower.
Instead, the worst-case scenarios many had priced in have not precipitated, and in fact, the US data from this week has been utterly dismal which has no doubt dampened at least some of the blind conviction that buying USD is the right thing to do during periods of economic uncertainty and risk aversion.
As if the global growth story wasn’t enough, the markets had one more rather important piece of data to look forward to at the end of the week with the release of the non-farm payrolls figure from the US.
Fortunately (or unfortunately) the release was mixed and rather uninspiring to say the least. With the markets looking for that certain piece of data to establish the upcoming trend in the month ahead, market participants were left wanting with the release of the cloudy jobs report.
The overall NFP number was marginally better at -125,000 (v -130,000 exp), but perhaps the more keenly followed private payrolls number showed a decline in the number of new non-governmental jobs added (83,000 v 110,000 exp).
The private payrolls might paint a more accurate picture of the condition of the US jobs market in the current climate considering the fact that the overall NFP number might be slightly distorted with 339,000 temp employees still part of the population count.
On the flipside, the overall unemployment rate in the US came in surprisingly better at 9.5 per cent (v 9.8 per cent exp), the lowest level since July 2009.
With the data not skewing to far one way or the other, market participants were left to digest a rather mixed release, which left them no better off than before the news was released. US equities closed marginally weaker on Friday following the news (down 4.5 per cent on the week).
In other news, Riksbank convened last week for the first rate decision since April, and in line with forecasts, the central bank raised the repo rate 25bps to 0.50 per cent. In the last statement from the April meeting, some members had argued for keeping the repo rate unchanged at 0.25 per cent for the rest of 2010, but attitudes have thawed, as the Swedish data in the interim has largely been very encouraging.
Q1 GDP smashed estimates with a 1.4 per cent q-o-q pace of growth, CPI is continuing to tick higher, and unemployment has dipped back below nine per cent (8.8 per cent last). Furthermore, Swedish retail sales came out at an impressive 1.6 per cent m-o-m (May data), equating to 2.7 per cent y-o-y growth – well above the expected one per cent m-o-m, 0.3 per cent y-o-y predicted by analysts.
The accompanying statement acknowledged that the economy was developing strongly, and forecast CPI at 1.2 per cent this year, two per cent in 2011, with GDP at 3.8 per cent this year, 3.6 per cent in 2011. Unsurprisingly the effects of the euro zone debt crisis have had an impact on the future projected path of rates, with the statement asserting there may not be the need for as big a rise, and indeed one member, Ekholm, voting against this month’s hike.
Turning to the Subcontinent, the Reserve Bank of India hiked rates for the third time this year in a ‘surprise’ announcement late Friday evening. The reverse repurchase rate was revised 25bps upwards to four per cent and the repurchase rate was also revised 25bps upwards to 5.5 per cent. Although the announcement was two weeks premature, it was inevitable considering the fact that India is combating a staggering inflation rate that’s in double digits – 10.16 per cent as per May’s latest reading.
The reaction in the Indian equity and currency market during Monday’s trading session to last Friday’s news was rather un-inspirational as the markets traded largely flat.
The RBI’s ‘surprise’ and premature rate hike has become somewhat of a norm these days and the markets would have been well poised to expect such a hike.
Looking ahead to the trading week ahead, with the markets no better off than they were before the release of the NFP number, currency and commodity traders will once again take cues from the release of macroeconomic data and the resulting performance of the global equity markets.
The week will start off rather stagnant with the US closed on Monday in celebration of Independence day, and with no major releases due from the US, some of the more important releases later in the week will be the Australian rate bank decision (unchanged at 4.50 per cent exp) and CPI data from Switzerland on Tuesday, followed by the euro zone GDP reading on Wednesday and the ECB (unchanged at one per cent) and BoE rate decisions (unchanged at 0.50 per cent) on Thursday.
– The author is the head of the DGCX Futures & Options trading desk at ACM ME DMCC. The views expressed are his own