Markets were very volatile last week and currency performance was directly correlated to position unwinding. The poor performance in the Nikkei seemed to reflect disappointment over structural reforms even with news that the Japanese Pension fund would increase their modest equity holdings.
We continued to witness a continued pressure on Emerging Markets currencies from investors worried by the eventual end of the Fed quantitative easing programs. That pressure on emerging markets continued as the Euro soared on cross demand and the market was exiting their short low yield currencies, long high yield trade, which sent the euro racing to 1.3062during the week
Jobless claims edged up, US yields drifted lower, and equities recovered their weakness witnessed in the past couple of days as investors started unwinding their US dollar bullish bets. Indeed, the positioning unwind saw the Dollar weaken. The Dollar Yen cross also came back under pressure on reports that Japanese market regulators would hike margins for retail investors who are believed to be long Dollar. The euro hardly dipped despite poor French employment.
On the foreign exchange side, currencies closed the week with a slightly weaker Dollar against the low yielders, but stronger against emerging markets high interest rate currencies.
The Sterling pound attempted a move higher during the week helped by an unwinding of sterling shorts against emerging market currencies; however, the reaction was fairly muted. After reaching a low of 1.5009, the Pound ended the week at 1.5200.
The Euro was well bid during the week helped by positive employment news out of Germany and after ECB’s Asmussen played down his support for negative deposit rates. After reaching a high of 1.3061, the Euro closed the week at1.2999 following a stronger USD across the board.
In the commodity complex, Gold prices range traded after higher than expected jobless claims that added doubt over the US recovery. The physical market remains strong with strong Asian demand. Gold prices closed the week below the 1400$ level.
Oil prices remain supported on the back of a stabilizing US equity markets in addition to the ongoing Middle East tensions and a rumor of a potential productions cuts from the OPEC.
In conclusion, global equity markets have not followed Japan’s market drop and have instead stabilized. While there are still a number of other factors to consider mainly the robustness of the US data and the Fed QE expectations, we expect the USD to stabilize and potentially recover
Jobless claims confusing investors
Jobless claims in the US rose to 354,000 last week, however the four-week average remained in the range of moderate labor market growth at 347,000. The data was up 10,000 from the previous week’s revised figure of 344,000. Economists had expectations for 340,000 claims. Analysts reported that Memorial Day might have had an impact on the increase due to the state governments closed for the holiday.
Job figures have become much more important lately with the Fed watching extremely closely the numbers in order to adjust up or down their asset purchases.
Strong Housing Market Recovery.
The latest Standard & Poor’s Case-Shiller index showed the best gain in nearly seven years in the month of March. Even if the price of the average American house is still down 28 percent from peak levels, the level is significant from the Fed point of view.
Europe & UK
Investors ignoring the negative economic data in the Absence of European tail risks
The positive tone continued in Europe with a positive Euro zone economic confidence registering 89.4 compared to 88.6 in April. Indeed, figures released by the European Commission suggested firms are more optimistic about the crisis, which may increase chances of the recession ending soon. Even with the pressure by the S&P rating agency towards France’s need to deliver the promised budget cuts to avoid a further credit rating downgrade; ECB members played down their support for negative deposit rates. The interesting news from Germany this week was Mr. Schaeuble German finance minister proposing that the state-owned development bank KfW would be used to provide loans to small and medium-sized enterprises in Spain, Portugal and possible Greece. The report did not mention a specific amount for the program but suggested it would be less than 10 billion.
French and Italian Unemployment at Record High
The number of jobless people in France rose up by nearly 40,000 in April or 1.2 percent to hit another all-time high. Over the last five years, it was the 53rd month out of 61 showing a rise, a fact that will pressure France to deliver more measures in order to avoid a potential imminent downgrade.
There are now 3.26 million people officially out of work in France, after the total jumped by almost 40,000 in April. This is likely to increase tensions between France and Germany especially after Angela Merkel urged France to implement the reforms requested by the European Commission in return for the deficit deadline extension granted this week. The comments came at a press conference with Francois Hollande.
Italy’s jobless rate on the other continued to deteriorate to a 36-year high in April. Unemployment in the country rose to 12 percent after the March reading was revised up to 11.9 percent from an initial 11.5 percent. The unemployment rate for people between the age of 15 and 24 rose to 40.5 per cent in April, the highest since the data series began in 1966.
The Organisation for Economic Co-operation and Development also reported this week that it expected the recession in Italy to be deeper than it previously feared this year and that unemployment is set to keep rising. The OECD said it had revised down its GDP forecasts for the country
UK Retail Sales plummet
The UK retailers are facing an increasingly difficult year as retail sales fell at the fastest level in 16 months. According to the Confederation of British Industry, the percentage of firms surveyed who saw sales volumes rise against those who saw sales fall led to a balance of minus 11 percent, the worst outcome since January 2012. Sales of clothing, footwear and household durable goods were all lower in May than a year earlier. Online sales were down for the first time since August 2011.
The Peninsula
