- This week’s sell-off will likely be short-lived with nothing new coming out over the past few days, just old fears that resurfaced as crude oil took another hit
- Faltering US yield increased the pressure on the greenback as the Dollar index retreated 1% over the past two days
- NZD/USD is on its way to testing the psychological resistance that lies at 0.66, while on the downside, a support can be found at 0.6348
After a modest recovery followed by a very short period of stabilisation, investors are falling off the wagon again. Asian equities tumbled on Wednesday following the lead from Europe and the US against the backdrop of renewed risk-off sentiment and falling oil prices. West Texas Intermediate crude is back below the $30 threshold, down 13% since Monday, while Brent crude fell 9.50% over the same period. It is worth noting that the Brent-WTI spread has hit roughly $3 since Monday on concerns about building stockpiles in the US.
As usual in such market conditions, safe haven assets have been sold like hot cakes. Since the beginning of the week the US dollar was down 1.70% against the Japanese yen, while the demand for government bonds remained more than solid, pushing treasury yields to multi-month lows. The US yields curve had flattened significantly with the 10-year trading below the 1.90% threshold, while the 30-year hit 2.64% for the first time since August 2015. On the short-end, fading Fed tightening expectations weight significantly on the 2-year which has moved back below 0.74%, down 7bps since Monday - or 36bps since early January (!). As a result, faltering US yield increased the pressure on the greenback as the dollar index retreated 1% over the past two days.
***Yann Quelenn, market analyst: U.S: hoping for a strong jobs report: A week after the FOMC decided to keep rates unchanged, markets are now focusing again on economic fundamentals, in particular on jobs data. ADP private payrolls will be well scrutinized today. Consensus is betting on an increase of 193k jobs in January but down from the 257k jobs created in December. Indeed, it is likely that we will not see the exaggerated December figures inflated by holiday hiring. The Fed's baseline forecast calls for four rate hikes this year and markets are pricing in that a continued strong trend of jobs creation this year should normally be sufficient to trigger those four raises. Yet, there are more than a hundred million Americans without a job so it leaves us some years before we see a relief in labour shortages. Consequently we believe that there are too many workers on the sidelines which adds downside pressures to wages. Despite official lower unemployment data and significant jobs creation, wage growth remains somewhat sluggish. We are highly sceptical on inflation picking up towards the Fed's target of 2% The Fed's dual mandate is far from being achieved despite massive intervention over the past decade. Weak data is the new normal for the U.S economy. First estimates of the Q4 GDP were released last week at 0.7% y/y, the weakest since winter 2015. Chinese economic slowdown and collapsing oil prices should lead to less investment and more job cuts. The Fed is definitely overly optimistic. Why would the institution succeed now where it has failed over the last ten years?”***
In China, the improving Caixin PMIs were of little help in reassuring investors about China’s state of health. In January, the Services PMI printed at 52.4 versus 50.2 in the previous month, while the Composite gauge came in at 50.1 from 49.4 in December. The Shanghai Composite slipped 0.38%, while the tech-heavy Shenzhen Composite edged up 0.47%. In Japan, the Nikkei fell 3.15% in spite of improving PMIs (Services was up to 52.4 from 51.5 while Composites increased to 52.6 from 52.2). In Europe, futures are broadly edging lower this morning following the footstep of Asian indices: the Footsie is down 0.49%, the DAX -0.64%, the CAC -0.68% while the SMI was up 0.07%. In our view this week’s sell-off will likely be short-lived as nothing new has come out over the past few days, just old fears that resurfaced as crude oil took another hit.
In New Zealand, the Kiwi surged 1% against the greenback on surprisingly better-than-expected job report. Unemployment rate fell to 5.3% in the fourth quarter (versus 6.1% expected and 6.0% in 3Q) on falling participation rate (68.4% versus 68.7% in 3Q) and improving job creation (+0.9%q/q vs. 0.8% consensus). NZD/USD is on its way to test the psychological resistance that lies at 0.66. On the downside, a support can be found at 0.6348 (low from January 20th).
Today traders will be watching inflation report from Turkey, Russia and Italy; PMIs from Brazil, Spain, Italy, France, Germany, the euro zone and the UK; unemployment rate from Norway; retail sales from the euro zone; MBA mortgage application, ADP employment change, PMIs and ISM non-manf. from the US.