Historically the first full-trading day after a U.S payrolls release tends to be the quietest trading day of the month. So far, the start to this week in Capital Markets is rather anticlimactic when compared to last five-business days. The initial euphoria witnessed after last Friday’s better than expected non-farm payrolls report (+295k and +5.5% unemployment rate) has been replaced with caution. Investors are beginning to fret that the reality of higher U.S rates will stymie the relative free ride that the market has come to expect from today’s global low rate environment.
In the overnight session, global equities are managing to track the sell-off in the U.S after Friday’s positive jobs report further fueled expectations that the Fed will commence a tighter monetary policy sooner rather than later.
A percentage of the market is already pricing in a Fed June rate hike, however, that meeting may come too soon. Nevertheless, expect investors to focus on next weeks FOMC meet on 17-18 March. Will Ms. Yellen and her fellow policy makers get to alter the Fed’s current language? Even though the Fed Chair indicated that she would not adhere to any time table for future rate hikes, dropping “patience” will have a higher percentage of investors turning their attention to a June hike rather than further out the curve.
German Bunds are the markets beacon
Euro stocks have garnered a large percentage of their support this year once the ECB announced their QE intentions back in late January. Now that Draghi and company’s bond buying program officially begins today, will investors who have bought the ‘rumor’ consider selling the ‘fact’? On the first day of the program Euro officials have been reported buying German, French and Belgium bonds this morning – this is allowing the rally on euro bonds to be extended.
Investors should follow the German 10-Year for greater clarity. With record low-yields, even negative yields will remain the order of the day within the Eurozone fixed income class. Do not be surprised to see German 10-year product finally trading through zero and into negative territory with the ECB’s deposit rate acting as the floor (-0.2%). It’s only then things will become interesting in Eurozone bond market.
The market continues to expect the semi-core bond markets of Austria, Netherlands and Finland to follow the move lower on German Bund yields. Currently, the peripheral bond market spreads are still sharply wider than their pre-crisis average. Do not be surprised to see the market attempt to tighten those spreads. From the ECB’s perspective it’s always easier to deliver a stronger impact when there is uncertainty over the reaction function. As markets become accustomed to QE and learn the rules of the game it will be interesting to see if the ECB/NCB’s will change the way in which QE is being implemented. For now its the blind leading the blind.
China remains on soft ground
In the overnight session, the Chinese markets have managed to lead the regional decline with their own mixed February trade data. Although the worlds second largest economy managed to post a record high surplus ($60.6B V $10.8), the import numbers decline has exceeded market expectations and has solidified the largest drop in a half a dozen-years. A near +50% rise in exports was also indicative of the data being distorted by seasonality of off-month Lunar New-Year timing this year. The decline in demand for basic material components of the trade numbers further underscore the slowing mainland economy – imports of iron ore were down +14% and crude oil down +9% on the year.
Reports like these are reason enough why the PBoC cut interest rates last week. Are investors witnessing the beginning of an easing Chinese rate cycle? Over the weekend, even China’s premier Li has indicated that there is more room for further stimulus measures if economic challenges persist this year. Investors need to keep a close eye on Australasian currency pairs (AUD, NZD in particular). Despite the RBA’s “one and done” (obviously questionable) easing policy this year, the AUD looks rather vulnerable. China remains Australia’s largest trading partner and when that country gets the sniffles, Australia can catch a cold. So far this week, the AUD/USD remains under pressure and has since fallen to a new one-month low below AUD$0.7700, while the kiwi is also under pressure, down -30 pips to around $0.7365.
EUR continues to look for support
Last week’s U.S data has been able to boost the dollar standing’s across the board. The “overextended and highly concentrated” trade remains the only trade in town according to the market. The dollar’s interest rate differentials are pressurizing the 19-member single currency to continue to hover atop of its new 11-year record lows outright. The market is also waiting to take its cue from today’s eurozone’s finance ministers meeting. It’s there that Euro politicians are discussing reform proposals submitted last week by the Greek government as it bids to unlock further financial aid.
At the moment, the EUR’s weakness has more to do with the dollars strength rather than Greece. The market needs a good reason to veer off target – September 2003 EUR low €1.0767
