By Dean Popplewell
Thursday, April 21: Five things the markets are talking about.
For the investor, it seems that risk sentiment is to prevail until told otherwise.
Capital Markets continue to take its cue from a clear sign of stabilization in the commodity space, while also responding positively to the early reports of the ‘earnings season.’
Both Brent and WTI crude futures have rolled over into June with bullish momentum above. Other hard metals, like copper and silver continue to push to new multi-month highs in the overnight session.
In the FX space, volatility amongst the major pairs remains relatively subdued as dealers wait for this morning’s ECB rate announcement.
1. ECB Draghi’s rate announcement and press conference
Is it the calm before the storm? Euro equity prices remain contained as investors wait for the outcome of today’s European Central Bank (ECB) rate decision in a few hours.
While no new measures are expected from the ECB’s April meeting, President Mario Draghi’s news conference will be closely watched for comments on the likelihood of future interest rate cuts and the strength of the 19-member single currency.
Draghi and company delivered their bazooka last month, a stimulus package that was intended to improve credit channels and not weaken the currency per se. Nevertheless, with the EUR managing to grind higher ever since the last meeting will only make the ECB’s job much more difficult. A weaker EUR is instrumental in guiding the Eurozone towards its inflation and growth objectives. Will Draghi be able to clip the EUR’s (€1.1290) wings during his press conference? The market expects Draghi’s tone to be dovish, but how dovish?
2. U.K. retail sales disappoint
U.K. data this morning revealed that retail sales figures fell last month (-1.3% vs. 0%). The disappointing print is further proof that the British economy is slowing down in the run-up to the all-important June 23 Brexit Referendum.
The sales headline print can now be added to the list of recent disappointing data points in the U.K. – weaker industrial production numbers and the first rise in unemployment in 12 months. Today’s number would suggest that U.K. consumer spending, the engine of recent economic growth, weakened last month amid subdued pay growth and a gloomier economic outlook.
Sterling trades weaker (£1.4315), close to its lows for the day. The market's main focus remains the U.K. referendum. Expect the pound to remain at the mercy of uncertainty over the outcome of the Brexit. Will sterling find support from Draghi’s press conference?
3. Swedish Riksbank adds to its stimulus program
The SEK (€9.1491) has rallied to multi-month highs versus the EUR after the Riksbank this morning held interest rates unchanged and decided to purchase a further SEK45b in government bonds during H2.
The Riksbank’s statement reiterated the view that it was prepared to be more expansionary between meetings – further cut the repo rate into negative territory and even intervenes in FX markets. It noted that the additional bond purchases are to reduce the risk of SEK from appreciating.
However, with Deputy Governor Skingsley entering a “reservation” on today’s decision combined with the market's interpretation that the announced QE purchase, a slower pace than previous, suggest that the Riksbank may be running out of ammo. By default, this has given the SEK its bid tone and a 13-month high print.
4. Commodities at five-month highs continues to support equities
The uplift in commodity prices continues to support global shares – equities worldwide have surged since February’s three-year low amid a recovery in oil and encouraging Chinese data. The rise in global price is encouraging investors to take on more risk.
Brent crude hovers atop of $46 a barrel after data yesterday showed that U.S. production slipped. Even Iraq suggesting that talks to freeze global output may occur next month has market bulls eying a $50 handle.
Stocks in Japan hit a two-month high overnight and ended the day up +2.7% as a weaker yen (¥109.74) is easing the pressure on shares of Japanese exporters.
Shares in Hong Kong and Australia also gained, though the Shanghai Composite Index ended lower in volatile trading. The rally in European stocks has paused this morning as investors wait for the ECB’s rate announcement and Draghi’s press conference for market direction.
Higher crude prices have helped push U.S. stocks to close at fresh highs for the year. After a two-month rebound, the S&P 500 and Dow industrials are both less than -1.5% off their record closes hit in May 2015.
5. Turkey relief rally takes a pause
The Turkish lira is marginally lower against the dollar ($2.8245) and the EUR (€3.1967) after the currency’s appreciation yesterday following the central bank’s -50bps rate cut. Turkey’s Central Bank Governor, Murat Cetinkaya, kicked off his tenure by accelerating a policy-easing cycle in the face of slowing inflation and a stabilizing domestic currency. The MPC cut the overnight lending rate for the second consecutive month to +10% from +10.5%, while holding steady the benchmark one-week repo rate at +7.5% and the +7.25% overnight borrowing rate.
The TRY’s relief rally yesterday is being attributed to the new Governor not caving in to political pressure and launching an aggressive monetary easing cycle. Fixed income dealers are pricing in a further 50-100bps reduction of the overnight lending rate over the next couple of months.