Robust US retail data and a continuing positive procession of Q1 earnings data lifted Wall Street and the dollar on Friday. However, the bond market continues to be more circumspect among all the upbeat noise from earnings – or perhaps relieved – with yields falling slightly across the curve.
The divergence is worth noting, especially if it continues throughout the week. Wall Street has an avalanche of Q1 earnings inbound from tech and industrial heavyweights this week. Given the out-performance of results thus far, a lot of positive expectations are being baked into equity prices at these levels, with the S&P just shy of all-time highs as an example. The end of the week, therefore, should provide more clarity over whether the equity markets are being irrationally exuberant, or the bond markets overly cynical.
The US dollar continues to confound pundits and remain stubbornly strong, riding again on Friday with the dollar index climbing 0.45% to 97.45. This was helped by weak PMI data from Germany and France sending the Euro (EUR) lower. My continued thesis is that the dollar will disappoint circling bears for all of 2019 for one simple reason: US yields among developed markets are the highest out there, with the Federal Reserve having at least partially normalised rates ahead of the next slowdown. A dovish Fed will give no solace to dollar bears as every other major central bank has now moved to an on-hold/dovish stance as well. They are, for the most part, in no position to cut rates much further ahead of a slowdown, should it occur later in 2019.
The week brings two rate decisions, Canada on Wednesday and locally, the Bank of Japan on Thursday. The devil will be in the detail with Canada in particular – a newly-minted member of the dovish central bank club. No change is expected from either, but investors will be watching for what they do or don’t say rather than the decisions themselves. The week culminates on Friday with the release of the US GDP data.
With Hong Kong, Australia and all of Europe (yes that includes Britain) still chasing Easter bunnies, and no data of note regionally, local markets should expect a quiet day. The US though has just announced it is tightening the screws on Iran and eliminating sanctions waivers. With Asia’s significant economies all heavy oil importers, this may cause some adverse reactions across the region.
Equities
Asian markets may struggle to follow Wall Street’s lead this morning as the US-Iran sanction waiver could spook investors. Regional heavyweights such as Japan, South Korea and China are all huge oil importers, and with oil already higher on the news, equity markets are unlikely to view higher energy prices.
FX
The US dollar continues to outperform as economic data and yields offer structural support. Weak data from Europe has seen the single currency give up its recent gains and slip to 1.1240 this morning. The British pound (GBP) also gave up the 1.3000 psychological level on Friday and trades at 1.2990 today.
The oil price spike will likely support the Indonesian rupiah (IDR) and Malaysian ringgit (MYR) today. Net importing heavyweights China, India, South Korea and Japan may find their currencies coming under pressure in the short-term on the Iran news.
Oil
Oil finished the week strong and has spiked higher this morning as the US government announced it will end the Iran waiver scheme. Brent Crude jumped 1.70% to USD73.25 a barrel, while WTI jumped 1.80% to USD65.00 a barrel. This could leave regional heavyweights scrambling to find alternative supplies in the near term in what is already a very tight structural supply situation globally. For now, geopolitical factors rule the roost on energy markets.
Gold
Gold has climbed slightly in Asian trading to USD1,277.50 an ounce, benefiting from higher oil prices driven by geopolitical tensions. With regional equity markets possibly coming under pressure today as a result, gold could be a principal beneficiary in today’s session, although a strong US dollar will temper gains.
