As October is the Fed’s POMO – Permanent Open Market Operations – last month (as it is mine in Hambros), we will see how the equity market will deal in a period with no QE. The NY Fed released yesterday its purchase operations for the month of October (as you can see it below), stating that the central bank will buy approximately $10bn worth of Treasury securities on an outright basis.
Starting October 28th (the first day of the next FOMC meeting), the equity bulls will start to rely on fundamentals once again. As we say, will this time be different?
(Source: NY Fed)
The market has switched to a risk-off mode for the past couple of weeks with the S&P 500 struggling to trade above the 2,000 level. As you can see it on the chart below, the index (purple line) is down 2.2% from its September’s high of 2,018.21 (Sep 19th) and AUD/JPY (black bar) is back below the 96.00 level (down 2% as well) and has been fluctuating within a 100-pip range for the past week.
Earlier this morning, both Germany and UK released a lower than expected manufacturing PMI, coming in at 49.9 (vs 50.3 expected) and 51.6 respectively (vs 52.5 expected). France reported its budget deficit forecasts for the next few years, and the government sees deficit falling to 4.3% of GDP in 2015 (from 4.4% this year), 3.8% in 2016 and eventually somewhere below the 3% threshold in 2017 (optimistic?).
EUR/USD was little sold this morning after the macro news (1.2584 is today’s low) and is now trading back above the 1.2600 level. Cable hit its 1.6160 support, the 76.4% Fibo retracement of 1.6050 – 1.6526 (as we reported yesterday) before coming back to 1.6200.
This afternoon, the market will watch West fundamentals with Mortgage Applications, ISM Mfg PMI and ADP National Employment in the US and Canadian PMI. We don’t see any major developments in the FX market as the market is now focused on tomorrow’s ECB meeting and Friday’s NFP.
After one year of shine, it feels that the British pound has entered into a bearish momentum. The currency, which used to be the market’s darling, is now down 2.20% against the greenback since its high on July 15 (1.7191 according to Reuters).
With the Fed ‘waking up’ (at least US policymakers more confident than in H1 this year) and strong macro US fundamentals (GDP Q2 first estimates at 4.0%, ISM Mfg PMI at 58.2 and six consecutive months of NFP prints above the 200-level), the US Dollar has remained traders’ favourite currency to hold over the past three weeks. While LT US yields struggle to rise in this high-pressure geopolitical environment, with the 10-year yield still trading below the 2.50% level, the USD index is now back to its January levels trading at 81.31.
On the UK side: We saw lately that the IMF raised its forecast for Britain’s economic growth (for the second time this year) by 0.4% to 3.2% in 2014 (and by 0.2% to 2.7% in 2015). However, there have been a few disappointing UK figures in the last couple of weeks which halted the GBP rally and played in favour of the US Dollar. For instance, the Markit Mfg PMI printed lower than expected at 55.4 (vs 57.2 consensus) in July and Manufacturing Output recorded a surprise fall of 1.3% in May (MoM), its biggest decline since January 2013 according to the ONS.
STIRs: the 2-year UK-US yield spread eased from 44.3 bps in early to 32.6bps, and the short-sterling Futures contract March 2015 is now trading at 99.0, which means that the implied rate is down 17bps at 1%, adding pressure on the British pound.
If we have a look at the IMM market, the net ‘speculative’ long sterling positions fell to 24.9K contracts (from 27.5) in the Commitment of Traders (CoT) report ending July 29. There are down from 56.4K recorded on July 1.
(Source: COT Forex – CFTC’s Commitments of Traders)
If we look at the chart below, we can see that Cable closed the week below its 100-day SMA (in blue) and is now trading 40 pips below it at 1.6821 for the first time in one year. As we said it earlier, the trend looks bearish; the next support on the downside stands at 1.6700.
Figures to watch this week: Manufacturing/Industrial output on Wednesday (Aug 6) and Bank Of England meeting on Thursday (Aug 7).
Lately, there were lots of talks about more QE in Japan, in order to stimulate the economy which could be impacted in the coming months by the sales tax increase that occurred on April 1st. If we summarise the economic data in the past few weeks, we saw a huge decline in April retail sales (-13.7% MoM, the largest decline on record), a decreasing Manufacturing PMI which now stands below the 50-recession level (49.4), a shrinking current account that recorded a ‘tiny’ surplus of ¥789.9bn in 2013 compare to ¥4.2tr in FY2012, a lower-than-expected Industrial Production (Prelim IP came in at -2.5% in April vs. 2.0%) and household spending that shrank 4.6%. It is clear that Japan is beginning to show the impact of the tax increase. And even though Q1 GDP expanded by 5.9% (annualized), the economy is expected to contract by 3% in the second quarter according to economists. In their last meeting (May 11), Bank of Japan policymakers warned that exports may remain weak in the near future due to sluggish demand from Asian countries.
However, an adjustment of the monetary policy at the moment remains tricky based on the last inflation data update. As expected, the institution of this consumption tax pushed inflation to 3.2% (Core Nationwide YoY) in April from 1.3% the previous month, well above the central bank’s 2-percent target.
Focus on USDJPY:
As the market expectations of new stimulus by the BoJ are being reconsidered, we are wondering if we could see a pause in USDJPY (or a sort of cap above the 103.00 level) in the medium term. Moreover, we need a turn in US yields (with higher vols in Treasuries), which have entered into a bearish momentum since the beginning of April. The 10-year yield decreased from 2.81% on April 2nd to 2.40% on May 28th and is now trading slightly above 2.52%. The sharp correction in the Nikkei (-9.4% YtD to May 31st) has also been one of the forces underpinning the yen.
USDJPY is now trading around its 100-day SMA (102.35), and the next resistance stands at 103.00 (April 5th high). However, with technical indicators showing neutral signals, it feels like the positive trend we have seen in the last couple of weeks is about to end (lower low between now and 103.00).