Traders await the Fed, RUB better bid
The US dollar continued to lose ground against most of its peers as sentiment on risk remained roughly positive ahead of tomorrow FOMC meeting. The dollar index gave up another 0.14% Tuesday morning as it reached 96.39. The single currency appreciated to 1.1355 (+0.15%) against the buck and is on its way to test yesterday’s high at 1.1359. Even safe haven currencies are grinding higher both the Japanese yen and Swiss franc blinking green on the screen. USD/JPY eased as low as 111.16, while the Swiss franc stabilised around parity against the USD.
Among EM currencies, the Russian rouble was the best performers over the last two days amid better than expected manufacturing data. Industrial output increase by a solid 4.1%y/y in February compared with a consensus of 1.5%. We could reasonably expect that the RUB would continue to appreciate in the medium to long term as the probability of US sanctions as slowly vanishing. In addition, the fact that the CBR has substantially increased its gold reserve, at the expense of US treasuries. Over the last 4 years, the CBR has increased its gold holding by 880 tons (+80%), while at the same time reducing its holding of long-term US treasuries by almost 90%. This could only positive for the rouble.
EU stocks sidestep growth risks
Expectations for global inflation continue to decrease as deflationary pressure mount. This indicated that the Fed will unlikely be challenged by suspected inflation over 2% target. The ECB in reactions slashed its 2019 forecast for both economic growth and inflation. Yet this might be a bit too late as the ECB is clearly behind the curve on this one. Market based measure indicate an elevated risk of a recession. German 10 year bond yields have decline to near zero perhaps the strong signal that European growth outlook is extremely weak. In addition, European equities are now tracking a similar pattern seen during the last recession between mid-211 and early 2013. EU economy growth remains positive with a quarterly GDP pace of 0.4% (1.6% annualized quarterly basis) suggesting the economic downturn currently is not deep. EU composite purchasing managers index (PMI) has decelerated from 58 to current reading of 51.9 (still above the 50 divide line).
Through the 2011-13 recession the PMI trended around 46, indicating a recession. European stocks have stage an impressive recovery bounce outpacing the most optimist EU analyst. Stocks recent recovery reflects optimize for economic stability however, increasing risk of a real recession could lead to further market declines. There are plenty of developments that could tip Europe into a necessary path. UK anticipated “Brexit”, leadership changes this year in Europe, including the head of the ECB and trade discussion of US led auto tariffs. European stocks have priced in a harder growth environment, which may leave them better equipped than other developed markets that are near their historical highs. There are some reassuring signs of progress, more volatility ahead if Europe’s economy fails to right itself.
