Fundamental Analysis 17.05.2017 – Market Outlook

17 / 05 / 2018 | Market News

Market Recap

The day of the commodity currencies! AUD, CAD and NZD led the ranks. Meanwhile USD fell even though US interest rates continued to rise, hitting a new high for this economic cycle.

In contrast to Tuesday 15th of May 2018, the higher US yields didn’t derail the US stock market, which managed to close higher – possibly because of a better-than-expected US industrial production figures. Higher bond yields due to stronger economic activity are a different matter to higher bond yields because of higher inflation. Housing starts disappointed but the forward-looking permits were better than expected.

It looks like Italy’s problems are starting to have an effect on the markets. Not only are the two parties still struggling to reach agreement on forming a coalition, but one of the points they seem to be discussing is whether to ask the European Central Bank (ECB) for debt forgiveness. Greece was bad enough, but Italy is the largest bond market in Europe, with EUR 2.4tn in bonds outstanding. One politician said they are discussing an EUR 250bn write-off, although another politician denied it. They are also reported to be discussing the renegotiation of European treaties, reform of the Stability & Growth Pact, and a revision to Italy’s budget contribution. Italian yields jumped and most peripheral bond spreads ended the session at their wides for the day, aided by a “flight to quality” within the EU that saw 10yr Bund yields decline 4 bps.

However, German Chancellor Angela Merkel in effect rebutted these ideas. Noting that the ECB’s loose monetary policy won’t last forever, she called for more integration of the Eurozone economies, saying: “the global view of joint currency unions states that you need to have some kind of element of last resort.” This could be a hint of measures to be discussed at the EU summit on 28-29 June 2018.

Given the tumult in Europe and the rise in US yields, it’s surprising to me that USD weakened vs EUR. Especially, the UST/Bund yield spread is now the widest it’s been since the inception of the ECB. It is unlikely that this is a tenable situation, particularly since Bund yields are negative out to 5 years –  USD is expected to recover in short order.


The good performance of stock markets, plus the successful rollover of some Argentinian short-term notes sparked a general risk-on tone and a relief rally in emerging market currencies.

GBP gained after the Telegraph newspaper reported that the UK will tell the EU that it’s prepared to stay in the customs union beyond 2021. The question is though, will that be acceptable to the hard-core Leave faction in the Cabinet? It seems to be “Brexit-lite,” leaving the EU in name but not in reality, as remaining in the customs union also means adhering to various EU rules and regulations without having any say in their making. 

NZD was up after the government raised its forecsats for the budget surplus for the fiscal years out to 2020. AUD/NZD continued to rally nonetheless as Australia’s employment data beat expectations – total employment was more or less in line with expectations (+22.6k vs +20.0k expected), but the mix was excellent – full-time jobs +32.7k, part-time -10.0k. The unemployment rate rose but that was due to a rise in the participation rate, which is a good sign. Given the longer-term headwinds to NZD, AUD/NZD could continue to rally somewhat.

Today’s market

Not much on the schedule today. Only one minor bit of data during the European and US days.

Retiring ECB Vice President Vitor Constancio will be making closing remarks at an ECB colloquium being held in his honor, then 1 ½ hours later he will make the opening address at the third annual ECB macroprudential policy and research conference. 

The Philadelphia Federal Reserve System (Fed) survey is expected to be down slightly but to remain firmly in expansionary territory. This compares with Tuesday’s 15th of May 2018 Empire State index, which had a similar forecast but wound up rising notably.

Bank of England Chief Economist Andy Haldane will give the closing remarks at a conference on economic measurement. The conference will cover all aspects of the measurement and use of economic statistics. Haldane could say something interesting about the bias in statistics and how the Bank of England adjusts for it, or which statistics it’s looking at particularly closely, which could be useful. 

Dallas Fed President Robert Kaplan (non-voter) will speak in a moderated Q&A session. He just spoke on Tuesday 15th of May, so nothing much is expected from him today.

Overnight we get Japan’s national Consumer Price index (CPI). Inflation is forecast to fall back notably, as it did with the Tokyo measure, which comes out about a week earlier (the purple line in the graph). The slowdown in core inflation is likely to be particularly disappointing for the Bank of Japan.

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