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Investors returned to riskier assets last week as a swath of positive US data suggested the world’s largest economy was regaining momentum. Oil snapped up 30% from January’s 12-year lows, supported by data showing that US oil production decreased to its lowest since November 2014.
The numbers from the US have certainly been encouraging, from jobs and manufacturing to consumer spending. The number of unemployment benefit claims increased but it was still in line with an improving trend, while manufacturing was better-than-expected but still hurt by the strong dollar.
Employment figures from the US remain an important focus in the market with weekly unemployment claims data – to be released on Thursday – providing vital information on the US Fed’s expected number of interest rate hikes this year. Federal funds futures suggest traders see the likelihood of a rate hike in December at 60%
Oil
Crude prices were on the mend as sentiment spread that a 20-month-long rout was bottoming out. However, with an estimated one million to two million barrels produced per day in excess of global demand – and Iran expected to raise its oil exports in March to around 1.65m barrels per day (bpd) from 1.5m bpd a month earlier – we at Capilis do not expect oil prices to increase sharply.
Europe
Elsewhere around the globe, data has not been as impressive. The eurozone CPI estimate, for the year up to February, went into deflationary territory. With the European Central Bank’s (ECB’s) target inflation rate at 2%, many investors are near-certain that ECB president Mario Draghi will deliver a handful of stimulus attempting to stave off deflationary pressure.
We at Capilis doubt Draghi will want to disappoint market expectations again, such as December’s failed attempt, and expect him to decrease the minimum bid rate by 5 basis points additional to an increase of (mostly) government bond purchases from €60bn per month to between €70bn and €80bn per month.
China
China’s February trade data, due on Tuesday morning, is likely to show a further slump in trade and drop in foreign exchange reserves as the world’s growth engine loses momentum and tries to maintain the value of its currency.
In an effort to shore up the economy battered by layoffs and bankruptcies, the People’s Bank of China injected an estimated $100bn into the banking system by reducing the reserve requirement ratio. A flurry of data – including foreign direct investment, new loans, outstanding loans and inflation – will likely show the need for Beijing to add more stimulus.
China’s sovereign debt outlook was downgraded from “stable” to “negative” by Moody’s, citing uncertainty from the implementation of necessary economic reforms, rising government debt and falling reserves.
Brexit
The so called “Brexit” prospect is leaving a damaging impact on the dominant service sector, with new orders rising at their slowest pace since early 2013, and hiring cut to lowest levels in almost two-and-a-half years. Manufacturing data on Wednesday will provide further indication of where Great Britain’s economy is being affected. Britons are expected to cast their Brexit votes in June.
A Reuters poll of analysts on Thursday suggested that the three-year emerging-market currency rout is probably easing off as commodities stabilise, central banks add stimulus and doubts about the ability of the dollar to set new highs.
SA
Domestically, the rand has been particularly volatile this year, overtaking the Brazilian real as the volatility bellwether. Global risk aversion and a strong correlation to commodities have left the rand in a vulnerable position. To make matters worse, a crisis between the finance minister Pravin Gordhan and the politically connected has added to uncertainty.
Economic data has been dismal. On Thursday we will be analysing figures from gold production, mining production and manufacturing production, together with most important piece of data in the form of business confidence.
Other highlights on the economic calendar this week:
Monday:
· Bank of Japan governor Haruhiko Kuroda speaks
· German Factory Orders
· Eurogroup meetings
· US Labour Market Conditions Index
Tuesday:
· Japan Final GDP
· German industrial production
· French Trade Balance
· Ecofin meetings
Wednesday:
· US Crude Oil Inventories
Thursday:
· German Trade Balance
Friday:
· German CPI
· Great Britain Trade Balance
· US University of Michigan Consumer Sentiment
Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here (http://www.capilis.co.za/) to visit the firm’s website.
