Markets were treated to a busy week that included rate decisions by the Bank of England and the European Central Bank, political stalemate in Eastern Europe, downward revision of US employment data, disappointing US Factory Orders and Comments by Fed members.
After a long build up, both the BoE and ECB left rates unchanged on Thursday, which added emphasis on Draghi’s press conference. Most market participants were anticipating that the ECB would announce adjustments to the bond sterilisation and when Draghi did not mention a change in his initial remarks, the Euro rallied substantially. The president of the ECB again disappointed those looking for policy loosening language, which set off a rash of short Euro covering into the end of the week.
In the US, Fed member Dudley press conference emphasised that it was “Time to take out the 6.5 percent unemployment threshold” and that he believed that “Market expectations for the path of short term rates seem appropriate currently” and that “This is closely aligned with the Fed’s expectations”.
Overall, there were a few themes on the week. Economic surprises in the US continue to slide and disappoint and the US dollar continues to struggle and five currencies in the G8 all made new highs against the USD for 2014. Even in Emerging Markets, the US Dollar weakened despite Russian tensions, and we saw heavy demand for Emerging Market currencies as investor perceived with the US economy stalling.
In summary, on the foreign exchange side, Markets closed the week with a stronger Sterling Pound and a flying Euro. After reaching a low of 1.6644 on Tuesday, the Pound ended the week at 1.6730. Euro on the other side behaved in a more bullish manner. After dropping to a low of 1.3708 going into the ECB meeting, the currency closed the week at the high of 1.3880
In the commodity complex, Gold continues to be supported by the political turmoil in Eastern Europe, hovering around the $1,350 level. In addition, the revision of the lower employment number in the US increased investor’s perception that the US economy is stalling and raised the attractiveness of the metal.
After a weak ADP numbers on Wednesday, the second employment report of the week came in better than expected as initial claims posted 323K when economists expected 336K. ADP’s January employment change were revised lower to 127K when last month were at 175K.
According to analysts, ADP’s numbers have missed the mark in tracking the government’s jobs figures over the past couple of months. In addition, harsh winter weather conditions, which kept retail away from stores and car dealerships, help explain why companies were hesitant to accelerate hiring at a more robust pace.
On the other hand, Philadelphia Fed President Charles Plosser stated: “I think it is going to be a couple more months before all the noise of the weather gets filtered out. He added, “Let’s be patient and take a longer-term horizon view”
The return of confidence in the Euro zone has favoured the strong performance of European assets in recent weeks. Inflows into EMU’s sovereign debt and equities have reached multi-year highs, and have been another source of euro resilience. Indeed, Spain’s bond yields dropped to an eight-year low. Italian and Greek government securities rallied as the Euro data has been coming on expectations. Spanish and Italian 10-year borrowing costs have both dropped below 4 percent this year for the first time since 2010 with investors encouraged by the ECB President remarks over their respective situation.
Despite very weak inflation pressure and money supply growth, and despite the fact that key economies such as Italy and France are barely out of recession, flows and sentiment have maintained the euro in the upper end of the recent range versus the dollar.
The opening remarks of the Governor’s parliamentary testimony were very much in line with the tone of the post-meeting statement released this week. Indeed, the Governor appeared to have reinforced the ‘low-for-long’ message in the Bank’s current policy assessment, by elaborating on the potentially positive effects for household and business plans stemming from a period of stability in the cash rate. It seems clear from this that the hurdle for the Bank to move away from its current neutral bias is relatively high.
According to analysts, Australia’s inflation is not quite as low as it might have looked six to twelve months ago, but nor is it accelerating to the extent a literal reading of the latest data might suggest. Indeed, the outlook for inflation is still consistent with the medium-term target of the RBA
Chinese finance Minister Lou Jiwei indicated this week that China’s growth target is no longer a rigid one as suggested by the NDRC. He said, “if GDP grows by 7.2 percent or 7.3 percent, we can also say the growth target of ‘about 7.5 percent’ is met”. Instead he noted that employment was of far greater importance saying “Whether the eventual GDP is above or below 7.5 percent isn’t particularly important, but employment matters more”. While China aims to create 11 million new jobs this year, Lou said more could be achieved.
On the shadow banking matter, it seems that China is more determined in engineering an “orderly default” process with limited systemic impact in a broader range of credit intermediation channels. The believe that by allowing for default events, China will achieve the goal of gradually correcting the mispricing of credit risk in different segment of the domestic financial market, and this will improve the efficiency of financial resource allocation.
Gold regained its attractiveness as a safe-haven investment as Ukrainian tensions surfaced during the past two weeks. Media sources reported that politicians in Crimea, Ukraine, brought forward a referendum, to potentially join Russia or become independent, to 16 March, two weeks earlier than had been planned.
While the focus may be on the upcoming US jobs report, the Gold market is likely to remain sensitive to Eastern Europe developments. THE PENINSULA
