Friday’s market action
Friday brought respite for US equity bulls, returning the S&P to the green in cash terms following four days of consecutive losses. That said, it still left the index in negative territory year-to-date, a marked underperformance in comparison to the stellar gains seen in European and Chinese equities. The massive dollar rally, dovetailing with the likelihood that the Fed will be the first ‘major’ central bank to begin the fraught process of hiking rates following years of ultra-loose monetary policy, has weighed on US equities and the US economic data has also started to weaken, albeit the labour market remains relatively unscathed thus far. The upcoming earnings season, kicking off in mid-April, will be very closely watched, to see just how damaging the dollar strength has been on corporate profits.
The final US Q4 GDP reading came in below expectations (2.2% vs Exp 2.4%) and Personal Consumption for Q4 gained 4.2%, slightly below expectations but enough to re-ignite the dollar strength against other major currencies and WTI crude after a two week pullback. WTI crude closed right on its lows, just above the $48 a barrel mark, fully erasing the gains seen after the news that Saudi Arabia had begun a bombing the Houthi rebels in Yemen as investors realised that this was unlikely to cause any fresh supply issues in the region.
Today’s View
The morning action saw Italian debt auction at record low yields, reflecting the lack of inflation risk in the Eurozone presently, the ECB’s considerable bond buying programme, and the hunt for yield of any kind in a world of zero-bound/negative interest rates. Elsewhere, the Shanghai Composite rallied to a new 7 year high on hints that the PCOB would ease rates further to counter the sharp slowdown seen in the Chinese economy over the past year. This week brings a slew of economic data, with US personal income and spending for February and US pending home sales, as well as German CPI. It will be interesting to note whether recovering German CPI will be enough to lead to a re-test of the 1.10 handle in the Eur/Usd or whether the dollar rally resumes in the lead-up to Non-Farm Payrolls on Friday, although with the Friday’s release coinciding with the Easter holiday period, market participants will not have the opportunity to react to the data until the following Tuesday. As such, trading volumes are likely to be on the light side and US equities are entering what has historically been one of the best performing months of the year, so look for the S&P to try to claw back last week’s losses.
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