Volatility Easing Ahead of G20 – will the PBOC act?
Markets were mixed yesterday with Europe in negative while the US and Asia, less China, enjoyed a positive session on back of a late rally in oil following a decline in the weekly DOE inventories. This made market players re-allocate into risky assets, which led to a drop in safe-haven assets. In currency markets this affected the traditional players CHF and JPY, while the Sterling took another pounding and has broken trend support from 2015 lows. Next support at the March 2009 lows at 1.3653. EUR/USD range trading within the 1.0950-1.1050 area.
Wednesday, we saw disappointing US New Home Sales for January on top of the better than expected Existing Home Sales on Tuesday. The disappointment was due to a weak development in the West region on top of two very good previous months. US Fixed Income was more or less unchanged on back of this. Recent market data has made the implied probabilities in futures market price in only two rate hikes from the Fed, but since there is a great deal of inflationary pressure (CPI last Friday took the market by surprise) and also the price levels in general suggests what we earlier have been stating, that the Fed is in a dilemma when it comes to the monetary policy. Since the Fed follows the Taylor-rule (which includes both growth and inflation) when setting the monetary policy, growth needs to pick up in order to justify a third rate increase this year. The ECB’s goal, on the contrary, is only to secure price stability with an inflation target to work around.
Going into the next sessions, the G20 meeting in Shanghai tomorrow will take centre stage for the market. China is the main driver for sentiment and risk-taking at the moment, and there have been rumours in the market, that the Chinese budget deficit will be raised to at least 4% of GDP. This morning, Chinese equities ended down more than 3% despite a slight weakening of the CNY fixing. We do expect the PBOC to act and attempt another sort of stimulus to the market in order to restore faith that the Chinese economy will continue to perform.
In Europe, the CPI can out in line with expectations, but the Headline YoY figure came out a tad lower than expectations. No real market reaction so far. In the US, we have a string of Fed Presidents speaking. Most important will be the FOMC voter Bullard, who changed his stance from hawk to dove recently. We could see the USD depreciating should Bullard reiterate his dovishness.
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