Widening divergence between Fed and ECB

Widening divergence between Fed and ECB
By Brenda Kelly
Janet Yellen’s words of caution are clearly ringing in the ears of traders this morning as the residual effects of a fairly hawkish Fed weigh on European equity indices. The dollar is clearly benefiting from Yellen’s belief that the US is on course to bounce back from an extremely sluggish first quarter. Indeed, the Fed chair is blaming statistical noise for this apparent weakness, thus her clear need to not appear oblivious to the overheated equity space will give pause today as traders return to their desks.

By Ipek Ozkardeskaya
Euro slips below the key psychological level of 1.10 against the USD. The widening divergence between the Fed and the European Central Bank is being largely felt today, as FOMC Chair Yellen’s speech on Friday has triggered broad based USD purchases. Yellen said that the Fed is still likely to start rate normalisation before the end of 2015, perhaps to cool-off the rally in stocks regarding which she has already voiced discomfort over the past month. The bond markets now price in a 55% chance for a December hike, up from 50% until last week. As uncertainties persist, the S&P500 stocks are looking for $2,150, while Dow Jones will certainly renew attempt to fresh all-time highs (target $18500) after completing current downside correction (target at 11,180), should the US first quarter GDP read confirms expectation of 0.9% contraction in second read on Friday.

Inside the Eurozone
By Brenda Kelly
The weaker euro, printing fresh monthly lows against the dollar has as usual been driven by fears of monetary tightening stateside but also by Greek woes and the usual uncertainty that the country will default on €1.6bn of loan repayments due to the IMF in June. We may well see the single currency languish further if the stand-off continues into the weekend as the imposition of capital controls seems to be the next step. The political upheaval has also found its way to Spain with the ruling Popular Party losing heavily to two political newcomers. Despite seeing growth of 0.9% in Q1, unemployment remains the second highest in the euro area at 23.8% and the country is still one of the most indebted in Europe. Greece has never been considered systemic, but Spain being the 4th largest economy in the Eurozone any upheaval could create contagion.

By Ipek Ozkardeskaya
Fears that Greece may not service its debt to the IMF on June 5th and the victory of anti-austerity parties in Spanish local elections sent the peripheral bonds lower as Europe steps in from bank holidays (Portugal being an exception); German and French debt are back in demand. The 10-year bund yield eases toward 0.5% for the first time in three weeks with further demand in horizon as ECB speeds up the pace of its bond purchases in May/June. As the euro slips below 1.10 verses US dollar, the selling pressures on euro are less cumbersome against the pound and the franc. The inflows in Eurozone sovereigns should give some more support to the euro primarily across Europe. Euro’s steady advance to 0.70p should see stronger challenge as discussions on EU referendum and tighter fiscal plans will be on UK’s agenda as Queen Elizabeth II will announce Conservative’s program for their second term in the government on May 27th.

FTSE and Dow Jones consolidate
By Brenda Kelly

The FTSE is off its highs and it’s the financial sector that is capping any real upside as the Libor fixing case comes to trial today with the banks shedding an average 1.5%. Ryanair has already lifted its profit forecast some five times but the 66% rise in profit after tax to €867m was still ahead of guidance and can in some respects be attributed to the improved customer experience and lower oil prices. Forward bookings also look buoyant and are on average 4% ahead of last year. Currency weakness, particularly in the single currency has aided and abetted the rise in profits but Ryanair is still tied into expensive oil hedges which will likely limit the shares’ gain. The stock is up 4% and testing its all-time highs at €11.60 having gained over 20% year to date. Some profit taking is not out of question today.

Plenty to look forward to on the US macro calendar today. Given that rate hikes will always be ‘data dependent’, bullish traders won’t want to see a meet or beat on April’s durable good’s orders. Consumer confidence is expected to remain at 95.2. We are back to the heady days of bad news being positive for equities. Assuming we ever left. We are calling the Dow lower by 50 points to 11180.