Stay vigilant during risk rally
(Peter Rosensteich, head of market strategy)
Market participants can feel the unleashed „animal spirit“ driving global stock prices higher. For five consecutive days the financial world has been blasting news of stock prices new all-time highs. US P/E estimates have expanded to accommodate higher EPS on Trump tax reforms. While solid corporate earnings, (70% of US names have beat forecasts), provide clear justification for the broad-based optimism, it’s hard to find an asset not improving as even safe-haven gold is finding buyers to $1237, preparing to test the $1245 range high. However, we remain slightly concerned over the current round of exuberance. First is our negative expectation from the Trump administration. Despite bi-partisan support for tax reforms Trump’s divisive nature could easily derail the positive pro-growth policy. Trump's first 30 day have been plagued by mis-management and bad decisions, a trend unlikely to change given his “bull in a china shop” personality. Secondly, are the risk measures in Europe that are quietly hinting at rising worries. EURCHF 3-month vol and risk reversal have spiked in recent days and have yet to normalise The short term spread between German and peripheral countries are re-widening. Despite the optimistic European data, the exception being the disappointing GDP read, the sell-off in all bonds not German hints of creeping uncertainty. Clearly the primary sources are the rapidly approaching Dutch and French elections. Spreads between German and French 10-year yields are now at the widest level since 2012. Given our current doubt we would remain short EURCHF heading into this period of US and European political insecurity. In addition we see short EURPLN as a solid strategy heading into the Dutch parliamentary elections at Geert Wilders of the populist Freedom Party still holds the lead.
USD unable to hold ground as yields ease
(Arnaud Masset, market analyst)
Despite the release of mostly upbeat economic data from the US yesterday, the greenback was unable to lock-in the gains and quickly reversed momentum. EUR/USD eased to 1.0521 as January’s headline inflation surged to 2.5%y/y versus 2.4% expected and 2.1% in December. Similarly, the core measure, which excludes the most volatile components, rose to 2.3%y/y versus 2.1% expected. Still on the bright side, after slowing during the four previous month, core retail sales jumped 0.7%m/m, while the market was expecting a reading of 0.3%. Retail sales were quite disappointing in the last quarter of 2016 and raised questions about the health of the US economy as personal consumption remains the number one driver of the world’s largest economy. The January figures bode well for the first quarter of 2017, should the trend continue.
On a less positive note, industrial production printed well below the median forecast as it contracted 0.3%m/m in January, while the market was expecting a flat reading. In addition, the December figure was downwardly revised to 0.6% from 0.8% initially estimated. This data contrasts sharply with the recent survey that suggested an upbeat mood in the manufacturing industry. Indeed, the manufacturing PMI together with the ISM manufacturing has been on solid footing since the end of the September quarter last year. This strong divergence suggests that the sector needs more than Trump’s boundless optimism to lift its head above the water.
On the technical side, the dollar index failed to break the 101.45-53 strong resistance area (50dma and Fibonacci 50% on January debasement) and has since then broke the 38.2% level. However, the index is still trading with a positive momentum as a break of the 99 level area is needed to confirm a trend reversal.
ECB minutes in focus
(Yann Quelenn, market analyst)
Early this afternoon, the ECB will release its account of the monetary policy meeting that was held on the 19th of January in Frankfurt. Usually ECB minutes do not reveal much but today we hope to gain some insight on the current QE programme as well as on the diverging views amongst policymakers. Indeed, views on European uncertainties are definitely strong even though those same uncertainties are clearly helping the ECB by lowering the single currency’s value. We will also closely monitor inflation expectation development which is now running at 1.1% and is expected to rise towards 1.4% at the end of the year. The ECB is very conservative in its approach as it intends to see inflation rise towards the 2% target by 2020. In any case, Eurozone reflation will be the yardstick of the ECB’s monetary policy this year.