Traders await the Fed; Ruble a good bet
By Arnaud Masset
The US dollar continued to lose ground against most of its peers as sentiment on risk remained more or less positive ahead of tomorrow's FOMC (Federal Open Market Committee) meeting. The dollar index gave up another 0.14% Tuesday morning as it reached 96.39. The single currency appreciated to 1.1355 (+0.15%) against the buck and is on its way to test yesterday's high of 1.1359. Even safe-haven currencies are grinding higher, with both the Japanese yen and Swiss franc blinking green on the screen. USD/JPY eased as low as 111.16, while the Swiss franc stabilised around parity against the USD.
Among EM currencies, the Russian ruble was the best performers over the last two days amid better than expected manufacturing data. Industrial output increased by a solid 4.1%y/y in February, compared with a consensus of 1.5%. We could reasonably expect that the RUB would continue to appreciate in the medium to long-term as the probability of US sanctions are slowly vanishing. In addition, the CBR (Central Bank of Russia) has substantially increased its gold reserve at the expense of US treasuries. The CBR has increased its gold holding by 880 tons (+80%) over the last four years, while reducing its holding of long-term US treasuries by almost 90% at the same time. This could only be positive for the ruble.
EU stocks sidestep growth risks
By Peter Rosenstreich
Expectations for global inflation continue to decrease as deflationary pressures mount. This suggests that the Fed will unlikely be challenged by suspected inflation over the 2% target, and the ECB has responded by slashing its 2019 forecast for both economic growth and inflation. Yet this might be a bit too late as the ECB is clearly behind the curve on this one. Market-based measures indicate an elevated risk of a recession. German 10-year bond yields have declined to near zero, sending a strong signal that European growth outlook is extremely weak. In addition, European equities are now tracking a pattern last seen during the 2011-2013 recession.
The EU economy growth remains positive, with a quarterly GDP pace of 0.4% (1.6% annualized quarterly basis) suggesting that the economic downturn currently is not deep. EU composite purchasing managers index (PMI) has decelerated from 58 to a current reading of 51.9 (still above the 50 divide line).
Through the 2011-2013 recession, the PMI (Purchasing Managers' Index ) trended around 46, indicating a recession. European stocks have staged an impressive recovery since, outpacing the most optimistic EU analysts. The recent recovery in stocks reflects optimized conditions for economic stability, but the increasing risk of a real recession could lead to further market declines. There are plenty of developments that could tip Europe onto a dangerous path. Brexit, leadership changes this year, including the head of the ECB, and discussions of US-led auto tariffs. Still, European stocks have priced in a harder growth environment, which may leave them better equipped than other developed markets that are near their historic highs. There are some reassuring signs of progress, but more volatility lies ahead if Europe's economy fails to right itself.