Sun, Feb 05, 2023 @ 16:58 GMT
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Mixed Sentiment Following Fed Cut

US equities tanked 3% following a surprise 50-basis-point cut from the Federal Reserve (Fed) yesterday. It appears that the move rather frustrated investors who were expecting a more creative, or impactful action than a simple rate cut, which they thought wouldn’t remedy to disrupted supply chain problems. We have a real issue here: investors are expecting central bankers to become the heroes that they are not meant to be.

Meanwhile, G7 ministers’ pledge to give the necessary support to fight back the coronavirus shock on the economy didn’t charm investors either.

Flight to safety gained momentum. The US 10-year yield dived below the 1% mark for the first time in history. Gold rebounded to $1652 per oz.

But sentiment in Asia was somewhat better.

The Dow, (+1.58%), S&P500 (+1.43%) and Nasdaq (+1.51%) futures bounced higher.

Nikkei (+0.08%), Hang Seng (+0.15%) and Shanghai’s Composite (+0.63%) recorded timid gains, as stocks in Sydney (-1.71%) lagged despite a better-than-expected GDP growth in Australia in the fourth quarter.

WTI crude held ground above $46.50 a barrel, as oil traders remained hopeful that OPEC and its allies could offer a satisfying solution to contain the decline in oil prices at their March 5-6 meeting. But we doubt that OPEC has a creative solution to fix the heavily deteriorated investor sentiment. While a consensus of analyst expectations point at a 1-million-barrel cut per day in production, even this number could fall short of what investors are quietly hoping for. Hence, OPEC is faced with a big dilemma. It must cut big to shake the market to the upside, but even ‘big’ may not be big enough. The risk for the cartel is, if a large production cut fails to boost the price of oil, then revenues will take a serious hit.

FTSE (+0.56%) and DAX (+0.65%) futures hint that a sell-off should be avoided at the European market open.

In the currency markets, cheap dollar pushed the EURUSD above the 1.12 mark but the pair met solid offers above this level. The relative strength index points that the single currency may have been bought too quickly in a too short period of time and a correction could soon kick in. But the heavy selling pressure on the US dollar will likely limit the downside potential, given that the European Central Bank’s (ECB) hasn’t got the Fed’s margin to curb its rates. In Europe, investors rather rely on fiscal stimulus, which, by improving growth expectations could put a floor under the euro sell-off in the foreseeable future. Due today, German and Eurozone retail sales are expected to have improved in January. Encouraging data could support the euro demand, but any negative surprise should trigger decent correction sales.

In the US, the ADP employment report may confirm that the US economy added fewer private jobs in January due to coronavirus-led slowdown in activity. A consensus of analyst expectations points at 170’000 new jobs versus 291’000 printed a month earlier. Weak data could further hit the US dollar.

The pound benefits from a feebler US dollar but gains remain vulnerable due to mounting no-deal Brexit anxieties. On the other hand, the Brexit could be a golden opportunity for London to forge a solid trade deal with Washington. But 46% of British exports are destined to the EU countries versus only 13% to the US. Therefore, even a good deal with the US may not alleviate the economic impacts of a disorderly divorce with the EU.

Finally, the Bank of Canada (BoC) will likely lower its benchmark rate from 1.75% to 1.50% at today’s meeting, but such move is mostly priced in. The loonie will remain exposed to downside risks in oil markets.

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