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An expectation of further volatility builds

Written by Ian Dobbs on May 28th, 2013.      0 comments

3.50pm (NZT)
Market Overview:
The big driver in markets over the last week has been the revelation from Ben Bernanke that the Fed could start scaling back quantitative easing (QE) over the next few months. This would happen if the employment picture continues to improve. This added to an already well supported US dollar which continues to make broad gains. It seems we could be in for a period of increased volatility as the markets pay even closer attention than normal to key US economic data. A hint of what to expect may have come from Japan after their stock market fell over 7% in one day on the back of some soft Chinese data. Quantitative easing has distorted market pricing across a broad range of asset classes. If that influence is going to be withdrawn, there will be all sorts of volatility as markets re-price asset valuations.

There is a lot of negative sentiment around the Australian dollar at the moment. A slowing domestic economy combined with softer Chinese data is keeping the currency under pressure. It’s been mostly one way traffic since the RBA cut the cash rate three weeks ago. Recent days have seen analysts from well-known investment banks make calls for a AUDUSD rate of 0.9000 by the end of the year. With very light economic calendars this week in both Australia and China there will be little chance to improve that sentiment. After such a strong down move in the currency recently, there is always a chance of a corrective bounce. Any such move will eventually run into willing sellers though.

New Zealand
New Zealand had some disappointing trade balance figures released at the end of last week. It looks as though the recent drought took its toll on this data, however the impact should be short lived. Some positive news for exporters has been the announcement that NZ is negotiating with China to make the NZD directly convertible to the Chinese Yuan. This would lower costs to exporters, and is a natural move now that China has overtaken Australia as New Zealand’s biggest trading partner. With only minor data out this week, the markets will turn their focus to offshore events. The most notable of which will be US consumer confidence and GDP. The NZD has been dragged down by a very heavy AUD, but has so far held above the psychologically important 0.8000 level against the US dollar. Reserve bank governor Graeme Wheeler is making a speech on Thursday titled ‘Forces effecting the NZ economy and policy challenges’ which will be closely scrutinised for indications as to the next policy move by the bank.

United States
The improving outlook for the US economy was reinforced with the release of durable goods orders on Friday. Coming in well above expectation, the data only served to keep the USD in demand against most other currencies. FED chairman Ben Bernanke’s comments about tapering quantitative easing last week are still a big focus for the market. The majority view seems to be that although we won’t see any change at the next fed meeting in June, the risks are high of a scaling back in the programme after that. This is all data dependant though. If the current trend of improving data continues, then we can expect something from the Fed in July or August. How stock markets will react must be of concern. Recent all-time highs in a number of equity markets are as a direct result of quantitative easing (read-money printing) policies. If the outlook is for that support to be slowly withdrawn, it’s hard to imagine we’ll see continued gains. The risk of disorderly moves, like the 7.3% fall in Japanese stocks last week, must surely have increased. This week’s key data out of the US comes in the form of consumer confidence and GDP.

The end of last week saw German GDP which came in bang on expectation. This was overshadowed by German business confidence which unexpectedly increased in May. These were important figures as recent data had been patchy at best, and it’s going to come down to Germany to drive any improvement in the Euro-zone in the near term. Core Europe needs to remain as strong as possible while the southern states get their respective houses in order. There is plenty for the market to digest this week with unemployment, inflation, retail sales and consumer confidence all scheduled for release.

United Kingdom
The UK has had a long weekend with Monday being a bank holiday. That didn’t affect the release of housing data that showed prices rose by their biggest monthly increase in six years. The increase was largely driven by London, where a surge in demand has outstripped supply over the past six months. The Bank of England’s (BOE) ‘funding for lending’ scheme can take some credit for these figures, as can the governments ‘help to buy scheme’ announced in the March budget. With last week’s economic numbers disappointing, the market will be keen to see better results from upcoming consumer confidence and mortgage approvals data.

The Bank of Japan BOJ) released minutes from their last policy meeting yesterday. There were no real surprises, as they see signs of a pickup in economic activity. They see a recovery in mid-2013, and say that communication with the market is critical. The BOJ has taken huge stimulatory steps recently, and it’s now a matter of waiting to see how these policies play out. There have been wild swings in both bonds and stocks recently and it’s hard to imagine we won’t see more of the same over the coming months. There is plenty of data out this week for the market to digest with retail trade, small business confidence and inflation numbers all set for release. The JPY has recently recovered some of its lost ground, but a sustained bout of strength seems unlikely given the current BOJ policies.

There was little economic news last week for the market to digest, but this week does see a couple of key events. First up is the Bank of Canada’s (BOC) interest rate decision on Thursday, and this is followed by Friday's release of first quarter GDP figures. The rate decision is expected to show no change. A recent poll of economists showed they believe the BOC will keep rates on hold until the second half of 2014. One of the biggest risks facing the Canadian economy is the overvalued housing market. How that plays out over the next year or so will have a big impact on any policy moves. This will be Governor Carney’s last policy meeting before leaving to take over at the Bank of England. His replacement will be Governor Poloz who is expected to keep monetary policy very stimulatory for the time being.

Major Announcements Last Week
  • UK Inflation 2.4% vs 2.6% expected
  • UK Retail Sales -1.3% vs 0.0% expected
  • Canadian Retail Sales -.2% vs +.2% expected
  • Chinese Manufacturing 49.6 vs 50.5 expected (contraction below 50.0)
  • German Manufacturing 49.0 vs 48.6 expected
  • US New home sales 454k vs 429k expected
  • German Business Confidence 105.7 vs 104.6 expected
  • US Durable Goods Sales +1.3% vs .6% expected