fx

Apr. 21, 2017 (Commerzbank AG) – France – Macron is no saviour

On Sunday, the French will decide which two candidates to send into the presidential election run-off on 7 May. If Emmanuel Macron turns out to be the new French president, we are likely to hear a big sigh of relief from the markets and many European capitals. But Mr. Macron is not a deep-rooted reformer. He will not tackle the decisive obstacles to higher employment. And at a European level, the debate over the appropriate response to the euro zone crisis will continue even if he wins.

Further topics:

ECB Council meeting: Steady hand until June, at least

As doubts should continue within the ECB Council that inflation will rise towards 2% in a sustained manner, the central bank ought to stick to its steady-hand policy for now and point to its projections in June. Moreover, the ECB looks set to adhere to its forward guidance.

Outlook for the week of 24 to 28 April 2017

  • Economic data: The fact that the Easter holidays fell in April this year rather than in March, will result in a roller-coaster ride for the euro zone core inflation rate. After declining to 0.7% in March, it will likely rise to 1.0% in April, only to fall back to 0.9% in May. In the US, the economy probably got off to another poor start to the year.
  • Bond market: Going forward to next week, rates trends in the wake of French presidential elections may prove bumpy after the first round, especially if Le Pen were to do better than suggested by current polls.
  • FX market: The elections in France are likely to dominate movements in EUR exchange rates. Against this backdrop, the ECB meeting is likely to take a back seat. At the same time, the recent weakness of the economy and inflation in the US are weighing on the US-dollar.
  • Equity market: The uncertain outlook for auto stocks remains a key headwind for the DAX. If auto stocks traded at their P/Es of April 2015 the DAX would already be at 12,900.
  • Commodity market: First OPEC production estimates for April should indicate that discipline in adhering to the agreed production cuts is still high which ought to support the oil price.


USA 

Apr. 18, 2017 (Tempus Inc.) – The U.S. dollar found some strength early in the evening but reversed those gains following breaking news abroad. U.S. Treasury Secretary Steven Mnuchin said that the greenback’s strength was a “good thing” in the longer term, walking back some of President Trump’s verbal intervention from last week. Nevertheless, the greenback is weaker against the majority of its rivals, except a few commodity-based currencies.

The dollar has extended its losses in early trading after data showed some speed bumps for the housing market. Housing starts fell 6.8% on a month of month basis in March, failing to meet dismal expectations of a 3.0% decline. Building permits did surprise to the upside, but not enough to stop the dollar’s decline.

Later this morning, industrial production is expected to expand 0.5% in March, up from a flat reading in February.

 

AUD

The Australian dollar and other commodity-backed currencies are lower this morning as the price of iron ore collapses. Iron Ore, a major export of Australia, is down 7.0% over the last two days, despite strong growth data released in China.

The Aussie is also under pressure after the Reserve Bank of Australia’s minutes showed policy makers believe underemployment “remained high.” The minutes also showed concern for the country’s housing market.

 

GBP

The British pound experienced wild fluctuations last night and is now currently nearly 1.0% stronger against the U.S. dollar than last night’s close. In a surprise announcement, British Prime Minster Theresa May called for an early general election for June 8th. May is seeking to consolidate power in Parliament in an attempt to strengthen her hand for Brexit negotiations. An opinion poll released yesterday shows her Conservative party with a 21 point lead over Labour, meaning she is likely to add to her parliamentary majority. As a result, the sterling has benefited and reached its strongest level since February.

Apr. 16, 2017 (Commerzbank AG) – Euro area – Sentiment still upbeat, but what does this mean?

Due to the Easter holidays, the current edition of Week in Focus is a shortened version. The next regular edition will be published on Friday, April 21.

We wish all our readers happy Easter!

Preview – The week of 17 to 21 April 2017

The purchasing managers‘ indices (PMIs) ought to have maintained their high levels in April. So far, however, upbeat business sentiment has not been confirmed by a corresponding increase in “hard” data.

We nonetheless stick to our view that a “sentiment bubble” is unlikely and therefore believe that production will rise in the months ahead.

In China, the economy should again have expanded by 6.8% in the first quarter.

Apr. 14, 2017 (Tempus Inc.) – The U.S. dollar is still reeling after a sharp sell-off yesterday afternoon. The Bloomberg Dollar Spot Index dropped below its 200 day moving average after President Donald Trump said the dollar is “getting too strong.” Many analysts have labeled the comments as “verbal intervention” to weaken the greenback. In the same interview he reversed previous promises that he would label China a currency manipulator and that Fed Chair Janet Yellen is “not toast” when her term expires next year. With no other risk events on yesterday’s docket, traders were forced to react to the President’s comments.

We will also continue to keep an eye on geopolitical risks in Syria and Korea.

Today’s data releases are unlikely to help the greenback. Wholesale prices in the U.S. declined in March for the first time since August of 2016. The print shows a lack of inflation pressures and will keep pressure off of the Federal Reserve to raise rates at their next meeting in May. Headline PPI decreased 0.1% following a 0.3% advance in the prior month. Later, the University of Michigan consumer sentiment print is expected to show a slight dip in April to 96.5 from 96.9 in the month prior.

AUD

The Australian dollar was the big winner overnight, gaining almost a full percent against the U.S. dollar. The Aussie was buoyed after data showed full-time jobs climbed the most in almost 30 years last month. Overall, employment rose 60,900 in March, beating forecasts of a 20K increase. The Aussie found added support on strong Chinese trade data. Chinese imports increased 26.3% year over year which is good news for Australia as nation relies heavily dependent on exports to China.

EUR

The Euro shot higher yesterday afternoon, benefiting from President Trump’s verbal intervention. The common currency has since given back most of its gains as political uncertainty in France looms over the currency. Inflation prints in France and Germany came in as expected. Inflation across the Eurozone has spiked higher over recent months, but we believe they have reached a peak. We do not expect the European Central Bank to change policy this year.

Apr. 9, 2017 (Commerzbank AG) – Why wages are rising so slowly

In the US and in Germany we are almost at full employment but wage growth still remains low. We examine the possible causes of this unusual situation. Key factors include the weaker negotiating position of employees against a backdrop of globalisation; the disappointing productivity trend and low inflation expectations. These forces which act as a brake on wages will at best diminish very gradually. This is especially true for the euro zone where the ECB will not hike rates any time soon.

Further topics:

Forecast meeting: Brief euro high

Stronger leading indicators will make it easier for the ECB to sell a “tapering” of bond purchases. But modest core inflation and ECB rates on hold suggest that although EUR/USD could rise to 1.12 by autumn, this is unlikely to be sustained and EUR/USD would then fall back again.

Outlook for the week of 10 to 14 April 2017

  • Economic data: While US consumers are in high spirits, they probably showed some buying restraint in March. In the euro zone, industrial production in February will reveal whether the economy actually moved up a gear at the beginning of the year.
  • Bond market: Amid a short trading week, Bund yields and EGB spreads are running into a liquidity drought though markets could be rattled by a whopping (net) supply at mid-week. EGB spreads should retain their erratic pattern through the week.
  • FX market: In the short term, the dollar will probably gain some ground against the euro amid positive US labour market data and concerns about possible US protectionist measures. However, the euro should maintain the upper hand in the coming months.
  • Equity market: A number of factors suggest that we could be set for a favourable Q1 reporting season. As a result, analysts ought to be more optimistic about the earnings expectations of many companies within the DAX and MDAX.
  • Commodity market: Brent should be able to hang on to its latest gains, as both IEA and OPEC are expected to confirm that the burden of production cuts is more evenly distributed. The IEA is also expected to indicate that the OECD countries have not yet cut inventories, but that this is merely a question of time.

Apr. 7, 2017 (Tempus, Inc.) – Global markets across all asset classes experienced heightened volatility as news broke that the U.S. launched a missile attack on Syria in response to the regime’s chemical attack on his own people earlier this week. Global equity markets shot lower and safe-havens, including gold, benefited. The Japanese yen and the Swiss Franc, traditional safe-haven currencies, also found knee-jerk support before reversing most of their gains. The quick reversal shows that markets expect the attack to be an isolated incident. However, the true fallout from the military action is unclear. Russia has already condemned the attacks as act of aggression against a sovereign state. Russia has been propping up the Assad regime in Syria for years and Russian soldiers are currently on the ground in Syria. The attack could also be seen as a warning to North Korea as the U.S. has shown it is willing to act unilaterally against rogue nations. Near-term headline risk and longer-term risk-off potential could spark more volatility.

Despite modestly benefiting from risk aversion trades overnight, the U.S. dollar found resistance this morning following poor jobs numbers. Payrolls rose by only 98K in March, failing to meet an already dismal 180K estimate. Adding insult to injury, last month’s print was also downwardly revised. In addition, wage growth slowed to 2.7% year over year, down from 2.8% in February. Some may see today’s number as an aberration or blame winter weather in March, but nevertheless, the poor reading will pour cold water on future interest rate projections.

Despite the dismal prints, the U.S. dollar has reversed course and is currently gaining across the board.

EUR

The Euro initially climbed overnight, benefiting from strong German industrial orders. However, the common currency has since succumb to general dollar strength and is about three-tenths of a percent weaker. German industrial production unexpectedly rose in February, led by the construction sector. Output rose 2.2%, beating expectations of a 0.2% drop.

GBP

The British pound was initially immune to Syria-related trades. But the currency came under pressure on reports that U.K. manufacturing and construction dropped. Manufacturing declined 0.1%, construction fell by 1.7% and industrial production dropped 0.7%. All of the prints were below expectations.

Apr. 1, 2017 (Commerzbank AG) – Euro zone – boost from the East

Corporate sentiment in the euro zone has improved massively in recent months, probably due mainly to demand from Asia picking up again. The main thrust seems to be coming from China. Despite that country’s continuing structural problems, the boost from the East should continue for the time being, and thus prevent a marked drop in sentiment indicators. However, since high private-sector debt levels are still weighing on domestic demand in the euro zone, there is probably only limited upward scope for Ifo and other indicators.

Further topics:

Turkey: Stable lira is a sham

The Turkish lira has stabilized since the beginning of the year, but there is no reason to sound the all-clear for the lira. It has benefited from improved sentiment against emerging markets currencies of late which has driven other EM currencies markedly up.

Outlook for the week of 3 to 7 April 2017

  • Economic data: Yet again, March will probably have seen no change in the US in the gap between the upbeat mood throughout the economy and no more than average hard data. The employment report should continue to trace a positive though not overwhelming development.
  • Bond market: With speculation on early ECB rate hikes subsiding, Bunds look well underpinned going into next week.
  • FX market: The sharp rise in EUR-USD should be over for now. Not only sentiment but hard data as well are arguing for downside potential.
  • Equity market: US monetary indicators such as the strong M1 money growth and the relatively steep US$ yield curve indicate that the S&P 500 bull might run further.
  • Commodity market: The price of Brent is unlikely to change much in the week ahead, distinctly above the 50 USD mark.

March 31, 2017 (Tempus, Inc.) – The U.S. Dollar sustained most of its gains overnight and is looking to perhaps improve this morning based on solid economic data that once more signals inflation growing and consumption being steady. The Bloomberg Dollar Spot Index grew by 1.0% thus far this week, but the “buck” may be under pressure. Investigations over Russian ties to President Trump have taken a turn since last night when former U.S. National Security Adviser Mike Flynn said that he’d be willing to speak to interested authorities if promised immunity in the case. Political meddling between nations is a serious matter and that may keep the U.S. Dollar subdued.

Personal Income and Spending data this morning showed consistency as expected. Inflationary growth continues to rise as Personal Economic Expenditures grew 1.8% over the expected 1.7% estimate while also being revised upward from the prior month. Other Fed members will speak today, but we’ll keep close eyes mostly on headlines over Brexit negotiations, which might get ugly quick and the potential for scandal in the world’s highest office.

EUR

The Euro fell 1.8% this week, based on European Central Bank dovish commentary and now deflationary pressures. The Euro-zone’s inflation slowed to 1.5% last month, way below expectations of 1.8%, a figure closer to the desired 2.0% target set by the ECB. Although the political risk of France going rightist is fading according to polls that show Emmanuel Macron, the pro-further-globalization candidate, could win with a comfortable margin, there are growing doubts over Brexit talks and the future of the EU.

The Portuguese government is saying that Brexit shows the EU needs to be reformed, echoing the sentiment of other troubled nations that feel squeezed by austerity measures placed on them to prevent defaulting on debt. The struggles are very real with an economic recovery that may need further help from the ECB next year and political uncertainty across the continent. EUR could have room for losses in the next week, maybe beyond.

GBP

The Pound fell this morning based on underwhelming data revealing that fourth quarter GDP in 2016 negatively affected consumer spending as inflation rose quickly. Trade as a result of a weakened Pound benefited, but this means only the bigger players in the economy saw growth. Although prices may be on the rise for some products, they are falling where it matters most.

Housing prices in the UK fell for the first time in two years, a worrisome figure considering that the housing and property industry suffered the most after the Brexit referendum. In terms of Brexit talks, the European Union now looks committed to holding a united front against any UK perks, saying that Britain will not decide its fate when it comes to how the full separation will take place. Friction is in the air, certainly not love.

Mar. 25, 2017 (Tempus Inc.) – ECB – Will they, or won’t they?

There are signs in the euro zone that monetary policy may soon be changing course. Even the doves on the ECB Council are talking of possibly raising rates more rapidly than previously envisaged once bond purchases come to an end. This could happen if the economy and inflation fare better than the ECB is currently predicting. However, there are strong counter arguments against this optimistic scenario. Inflation, for example, will probably fall more rapidly over the coming months than the ECB is assuming.

Outlook for the week of 27 to 31 March 2017

  • Economic data: The core inflation rate in the euro zone is likely to have fallen from 0.9% to 0.7% in March, though a (temporary) surge to 1.0% is likely in April. This is all down to the timing of the Easter holidays, which fall in April this year against March in 2016.
  • Bond market: Government bond yields are edging lower again as markets put reflation expectations from Trump’s stimulus plans to the test. Ten year Bund yields look likely to push the floor of the recent trading range lower. Elsewhere, the Corporate Schuldschein segment should continue its growth.
  • FX market: US and euro zone politics recently provided tailwinds to EUR-USD. However, amid ongoing political risks in the euro zone, the further euro upside should be limited. As the UK announces its Brexit intentions, GBP should also come under renewed pressure.
  • Equity market: Amid the still-very positive overall conditions, German companies should make further acquisitions this year. This will push goodwill on DAX company balance sheets still higher. Under gloomier general economic conditions, write-downs might become necessary, which could painfully reduce the equity capital of some companies.
  • Commodity market: Brent is likely to fluctuate around USD 50 per barrel next week. While we are likely to see signs that OPEC also cut production in March as agreed, the likely further rise in US inventories will show that supply remains ample, arguing against a price recovery.

Mar. 18, 2017 (Commerzbank AG) – Le Pen – What if?

According to the polls, Marine Le Pen has little chance of becoming the next French president. But uncertainty is high and many investors want to know what would happen if Le Pen were to win. Might she call an EU referendum? Would there be a flight of capital? Would Draghi and Merkel rush to help? Would EMU survive in the long term without France? In the short term, a Le Pen victory could, to say the least, produce chaos.

Further topics:

Brexit: The way is (un)clear

The legislation necessary to give the prime minister the authority to trigger Article 50 has now cleared parliament. But formal notification may only be delivered in the week of 27 March following the threat of another Scottish independence referendum and serious Brexit negotiations may not take place until June.

Outlook for the week of 20 to 24 March 2017

  • Economic data: Sentiment in the euro zone economy is running far ahead of the hard data and the longer this situation lasts, the more intensely the markets may discuss an exit from the ECB’s ultra-expansionary monetary policy.
  • Bond market: With the Dutch election and the latest Fed policy rates now behind us, investors’ focus will be on macro data releases, EGB supply and what Fed policymakers have to say through the week.
  • FX market: Currency markets look set to be in for a quiet week and the market will therefore likely focus on the fallout of the ECB and Fed policy. Political concern is likely to rise up the agenda, implying that the euro should lose ground against the USD.
  • Equity market: With 23 DAX companies announcing a rise in dividends last year, total payouts are likely to have risen by 8.8% y/y to a new all-time high of €31.8bn. A dividend yield of 2.6% is still relatively attractive compared to fixed income yields, which remains a key supporting factor for DAX investors.
  • Commodity market: The first exports and stocks data for non-OECD countries since the OPEC production cut are being eagerly awaited although oil prices should trend sideways until the next release of production data.