- Emerging markets have worst sell-off in months as investors question the sustainability of the recent recovery
- We anticipate further negative consequences for emerging market currencies
- We do not think that the Federal Reserve will hike interest rates today but expect a strongly dovish statement as the Fed sticks to a wait-and-see strategy
- EUR/USD may continue treading water between 1.1070 and 1.1110 as traders consolidate their positions
- USD/JPY may further gain above 113.65 as traders start to switch their long JPY position to short ones against the backdrop of a weak inflation outlook and sluggish growth prospects in Japan
Emerging markets experienced their worst sell-off in months as investors question the sustainability of the recent recovery. In South America, the Brazilian Ibovespa was off 3.56%, down to 47,130 points, while in Argentina the Merval Index fell 3.74%. On the FX side, emerging market currencies also went through a tough session with local currencies falling massively. The Brazilian real was off roughly 3% against the greenback, while the Mexican peso slid 0.65% amid a broad-based commodity sell-off. Only the Argentine peso was able to gain ground as it rose around 2% against the US dollar and returned to 14.5220.
The US data released yesterday was rather disappointing and painted a mixed picture of the world’s biggest economy. Advanced retail sales beat the median forecast contracting only 0.1%m/m versus -0.2% expected. However, January's figures were revised to the downside, from a 0.2%m/m expansion to a -0.4% contraction, meaning that overall February’s data is pretty weak. Similarly, February PPI came in on the downside printing at -0.2%m/m, matching expectations, as the effects of the oil recovery lag behind. However, the market’s response to this data was relatively muted as traders are already focused on this evening's FOMC meeting.
Like most market participants, we do not expect the Fed to hike interest rates against the backdrop of mounting uncertainty about global growth - and the recent recovery in commodity prices changes nothing in the grand scheme of things. Given the recent lack of communication from Fed members - compared to last year, when Fed members were claiming the strength of the US economy on a weekly basis - we rather expect a dovish statement as the Fed sticks to its silent wait-and-see strategy. EUR/USD is treading water at between 1.1070 and 1.1110 as traders consolidate their positions. Overnight, USD/JPY rose sharply to 113.65 in overnight trading, up almost 0.60%, as traders start to switch their long JPY position to short ones against the backdrop of a weak inflation outlook and sluggish growth prospects in Japan.
In Asia, equity returns were mixed. Japanese shares headed south with the Nikkei down 0.83%. In mainland China, tech shares were sold-off, while the broader market blinked green on the screen. In Taiwan, the Taiex partially erased yesterday’s heavy losses rising 1.02%. In India, the Sensex dropped 0.64%, while in Bangkok shares were down 0.50%. In Europe, futures are pointing toward a higher open with local equity indices trading in positive territory.
***Yann Quelenn, market analyst: FOMC meeting: Financial markets have definitely ruled out a rate hike from the FOMC today. However, markets are currently pricing in a rate hike to happen before June. U.S. domestic difficulties have been laid bare by the global recession and the Chinese slowdown. We believe that there are more significant downside risks to the U.S. economy to come and expect weaker demand in the medium term. This supports a more dovish stance from the Fed for 2016. Retail sales data is still on the soft side. February’s print was very weak at -0.1% and January’s data has been largely revised down (-0.4% m/m vs. 0.2% m/m). The first rate hike did not particularly disturb the market. It is likely that the Fed will continue to hint at a 2016 hike in order to avoid unnecessary market turmoil. The Fed sounded dovish at its last meeting bringing up the subject of negative interest rates. Even though this was ruled out, we believe that a larger global recession could change this attitude. We expect comments from the Fed about the adoption of negative interest rates in several countries.
Inflation is still far from the Fed’s target of 2% but January core inflation saw its biggest rise in about four years, growing by 0.3% despite low energy prices driving inflation lower. Despite this, the Fed is betting on the current low commodities price situation being transitory, which could prove to be the case as oil prices are currently bouncing back. Further improvement remains to be seen. U.S. elections consumer sentiment is likely to improve as patriotic feeling tends to improve at such times. This may provide a fresh boost to domestic consumption and push inflation higher, which would add some support to the raising of rates but would not be sufficient, in our view to trigger a rate hike this year. Job market conditions are constantly improving. The unemployment rate remains low, around 4.9%, despite continued weakness in the manufacturing sector. The situation was pretty much the same in December and it did not prevent the Fed from hiking. In other words, we believe that the labour market is not the primary driver of a rate hike if it remains as resilient as it is right now.”***
Today traders will be watching the UK unemployment report and Osborne’s budget speech before the parliament; MBA mortgage applications, housing starts, building permits, CPI, industrial production, capacity utilisation and the FOMC rate decision from the US; manufacturing sales from Canada; retail sales from South Africa; GDP from New Zealand.