Doves in control
It was doves and not drums we could hear in Stockholm overnight as the Swedish Riksbank belted out a chorus that said, “lower for longer,” which is clearly a very popular song among central banks at the moment. In fact, I heard almost the same song from both the Turkish central bank and the Bank of Japan yesterday.
The world’s two-speed economy slapped the markets in the face overnight, with Sweden extending its -0.25% repo rate until the end of 2020, the Bank of Japan holding rates at -0.1% until late 2020 and the Turkish Central Bank removing the hawkish bias completely from its rate-decision comments. In Turkey’s case, rates are 24%, which is the only thing keeping the Turkish lira (TRY) alive. Strip out the country’s risk premium, which is around 24%, and you’re left with 0%. You get the picture.
The world’s two-speed economy is in full cry, with the big block V8 engine we call the US equity market firing on all cylinders, while an ever-increasing number of central banks globally (including the US Federal Reserve), tell us all is not right in Denmark, or maybe that’s Sweden. Thankfully the US bond market and the US dollar have held steadfast, preferring the bigger picture rather than the equity-driven fast-money view.
With China moving to more surgical rather than blank-cheque blanket stimulus measures, the divergence between the equity versus currency and bond markets seems to be growing more pronounced each day. This may not be a story for next week or even next month, but those doves will turn into drums in 2019 Fernando.
Wall Street itself had a mixed bag of a day on the earnings front. The Dow Jones dropped 0.5%, dragged lower by industrial titan 3M. The tech-heavy Nasdaq rose 0.2% after Microsoft outperformed and the S&P 500 stayed flat. Tonight’s US GDP print takes on much greater importance now with so much good news pumped into equity markets, and a downside miss could provoke an outsized correction lower to finish the week.
Asian markets diverged from a bullish Wall Street yesterday and may do so again this morning. Japanese Preliminary Industrial Production has just been released and has failed with a much worse-than-expected 4.6% YoY. This is unlikely to give regional markets the jump start to finish the week they would have hoped for. After a busy morning, we can likely expect activity in Asia to slow this afternoon as Japan heads into its extended Golden Week holiday.
The FX markets awoke from their slumber overnight as a dovish Swedish Riksbank saw the Swedish krona (SEK) plunge against the dollar. This had a knock-on effect, with the euro dropping to 1.1135 and the British pound (GBP) falling to 1.2895 this morning. Emerging markets also struggled in the overnight session as central bank unease about growth saw currency traders continue rotating back into USD.
For now, there is no reason to change this thesis in the short-term. With the US markets performing well, offering high yields and safe-haven status, it’s hard to construct a bearish case on the dollar for now.
Japan is unlikely to be impressed with this morning’s Industrial Production data, following on from a very circumspect BOJ yesterday. With Golden Week upon us, Tokyo could see long positioning trimmed as investors reduce risk.
With such a mixed bag of results from Wall Street overnight and heavyweight GDP data due this evening, regional markets could adopt a cautious approach today, preferring to continue lightening risk after an extended bullish run.
After reaching six-month highs, profit-taking has hit oil contracts. Brent Crude fell 0.50% to USD74.20 a barrel while WTI dropped 1.40% to USD65.00 a barrel. After such an impressive run higher, a pause for breath is both welcome and expected. The underlying supply situation, especially for Brent, remains constructive overall however and dips should be supported in Asia trading today.
Gold climbed to USD1,277.50 an ounce overnight – a 0.20% gain. Gold received support from a procession of wavering central banks overnight and an increasingly likely economic crisis in Argentina, helping to offset a stronger US dollar. The yellow metal could remain supported in Asia today ahead of the weekend and holiday season starting next week.