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24.03.2016 15:17 -
The chances of an Easter surprise
Financial markets quiet ahead of Easter holiday
Incoming US data crucial for macro picture
Things could look very different come Tuesday
“We don’t have a second chance, we’ve already played them twice” — Trevor Brooking
As we approach the long Easter Bank Holiday weekend, financial markets (and the London Underground) are notably quieter. However, while it is likely that participants' attentions will drift to thoughts of weekend festivities, we are of the opinion that financial markets are at a very important inflecton point and thus would urge greater attention to developments up to and over the long weekend, not less.
Things may well look very different on Tuesday.
“You twist and turn like a… twisty turny thing” — Blackadder
From the very beginning of 2016, equities and risk assets came under pressure as fears of US normalisation, Chinese currency devaluation and capital outflows, and ultimately global economic slowdown spread fear across financial markets.
This risk-aversion saw a capitulative low point around February 11. The official response was that “there is no need for a crisis response as we are not in a crisis situation” (Wolfgang Schaeuble, prior to the February G20 summit). From this point, a squeeze higher of significant magnitude took hold.
The move up from the February lows was counter-trend, counter-consensus, and more sustained and substantial than even the most optimistic bulls had expected.
Fuelled by a stabilisation of the Chinese yuan (and a cessation of the publication of Chinese capital account data), a rally in the oil price and commodity complex, the rally was also boosted by the monetary shocks of the Bank of Japan's negative interest rate policy and a raft of monetary easing measures from the European Central Bank.
“Sail them home with acquiesce... on a ship of hope today” — Oasis, "Masterplan"
цитирайIncoming US data crucial for macro picture
Things could look very different come Tuesday
“We don’t have a second chance, we’ve already played them twice” — Trevor Brooking
As we approach the long Easter Bank Holiday weekend, financial markets (and the London Underground) are notably quieter. However, while it is likely that participants' attentions will drift to thoughts of weekend festivities, we are of the opinion that financial markets are at a very important inflecton point and thus would urge greater attention to developments up to and over the long weekend, not less.
Things may well look very different on Tuesday.
“You twist and turn like a… twisty turny thing” — Blackadder
From the very beginning of 2016, equities and risk assets came under pressure as fears of US normalisation, Chinese currency devaluation and capital outflows, and ultimately global economic slowdown spread fear across financial markets.
This risk-aversion saw a capitulative low point around February 11. The official response was that “there is no need for a crisis response as we are not in a crisis situation” (Wolfgang Schaeuble, prior to the February G20 summit). From this point, a squeeze higher of significant magnitude took hold.
The move up from the February lows was counter-trend, counter-consensus, and more sustained and substantial than even the most optimistic bulls had expected.
Fuelled by a stabilisation of the Chinese yuan (and a cessation of the publication of Chinese capital account data), a rally in the oil price and commodity complex, the rally was also boosted by the monetary shocks of the Bank of Japan's negative interest rate policy and a raft of monetary easing measures from the European Central Bank.
“Sail them home with acquiesce... on a ship of hope today” — Oasis, "Masterplan"
Most recently, the surprisingly dovish tone of the March Federal Open Market Committee meeting added further monetary buoyancy to equities and risk assets. Equally as significant, however, was the fact that the Fed dovishness led to a capitulative decline in the USD as the Fed cut rate hike expectations through its "dot plot" revisions and increased its rhetoric over broader global economic uncertainties.
Our view remains, however, that it will ultimately be inflation that troubles the Fed in 2016 and now that the Fed has acquiesced to the market's interest rate expectations, we would expect a stabilisation and ultimately (albeit modest) steepening of the US yield curve to evolve from here.
Losing the (dot) plot?
It is interesting that over the last couple of days, there has been a meaningful rise in US yields after the sharp, FOMC-induced decline. Hawkish commentary from the Fed's Evans, Harker and Bullard (who also called for an end to "dot plot" publication) address the surprisingly dovish bias from the FOMC and perhaps indicate an intentional rebalancing (redressing?) of the Fed's "forward guidance" back towards a gradual (but actual) normalisation process.
The Fed speakers’ insistence that April is a "live" meeting will also increase market sensitivity to to the US data. This has significant implications for USD positioning
Higher oil inventory data yesterday also suggest that the equity bid tone from commodities may have peaked and empirical data from BoA that corporate buybacks accounted for around 85% of net nominal equity buying in February suggest potential downside vulnerabilities for equities.
From our perspective this likely also signals a turn in the USD (the Treasury versus bund spread movement recently suggests that EURUSD should be significantly lower already). If we are right in our expectations of renewed weakness in equity and risk assets, the potential downside is most acute in commodity currencies as well as GBP.
цитирайOur view remains, however, that it will ultimately be inflation that troubles the Fed in 2016 and now that the Fed has acquiesced to the market's interest rate expectations, we would expect a stabilisation and ultimately (albeit modest) steepening of the US yield curve to evolve from here.
Losing the (dot) plot?
It is interesting that over the last couple of days, there has been a meaningful rise in US yields after the sharp, FOMC-induced decline. Hawkish commentary from the Fed's Evans, Harker and Bullard (who also called for an end to "dot plot" publication) address the surprisingly dovish bias from the FOMC and perhaps indicate an intentional rebalancing (redressing?) of the Fed's "forward guidance" back towards a gradual (but actual) normalisation process.
The Fed speakers’ insistence that April is a "live" meeting will also increase market sensitivity to to the US data. This has significant implications for USD positioning
Higher oil inventory data yesterday also suggest that the equity bid tone from commodities may have peaked and empirical data from BoA that corporate buybacks accounted for around 85% of net nominal equity buying in February suggest potential downside vulnerabilities for equities.
From our perspective this likely also signals a turn in the USD (the Treasury versus bund spread movement recently suggests that EURUSD should be significantly lower already). If we are right in our expectations of renewed weakness in equity and risk assets, the potential downside is most acute in commodity currencies as well as GBP.
“Genius is nothing but continued attention” — Claude Adrien Helvetius
The US data calendar for the rest of the week is squashed into today (with the exception of the second revision to the Q4 US GDP data, and the notable PCE component), and amid what we expect to be a heightened sensitivity to US data we are increasing our attention to market developments over the long weekend, not reducing it.
As we stated above, things may well look very different on Tuesday.
цитирайThe US data calendar for the rest of the week is squashed into today (with the exception of the second revision to the Q4 US GDP data, and the notable PCE component), and amid what we expect to be a heightened sensitivity to US data we are increasing our attention to market developments over the long weekend, not reducing it.
As we stated above, things may well look very different on Tuesday.
