Smoke clears – smoke ahead
Markets have settled after Monday’s excitement about Germany’s coalition, Italian populists’ victory and US President Trump’s presumed trade war. The VIX volatility index fell to 18 from 26. So here come the next events: China’s National People’s Congress started on 5 March, the European Central Bank meets on 8 March, Italy’s coalition talks have started and US non-farm employment data for February will report on Friday the 9th.
Italy is headed for a hung parliament. We could see unwinding of prior reforms, but probably not a strong enough bloc to pass structural reforms. EUR/USD options are biased toward the downside. The Bank of Japan says it will not abandon negative interest rates. In the US, Federal Reserve Governor Lael Brainard will speak publicly today: her comments could indicate a hawkish bias, which would give the USD a limited bump.
Reserve Bank of Australia monetary policy unchanged
The Reserve Bank of Australia held interest rates this morning at 1.50%, unchanged since August 2016, and the 17th meeting at this level. Weak economic data suggest no interest hikes in 2018. Unemployment is approaching a full-employment minimum of 5.0%, yet wage growth is low and neutralized by inflation. December’s trade balance drastically decreased, from close-to-zero to AUD -1’358 billion, its worst performance since October 2016. Equities were heading higher, the S&P/ASX 200 up 1.14% at 5’962 while Australian 2-year and 10-year Treasury yields remain at 2% and 2.82%.
