Asian bourses were mixed with the Hang Seng Index retreating from the five month high registered on Tuesday while the Nikkei and Shanghai Composite gained 0.5% and 0.1% respectively. Chinese stocks, especially utilities advanced on speculation that the government could announce measures to tackle water pollution.
The World Bank lowered its global growth forecasts on Wednesday from a previous projection of 3.2% in January to 2.8% for 2014, while maintaining its 2015 forecast of 3.4%. The main factors contributing to the revision downward include the weather related contraction experienced in the United States earlier in the year, the geopolitical conflict in Ukraine and financial market turbulence. Expansion in the United States was reduced from 2.8% to 2.1% while the economies of the BRICS were issued warnings that prior to the Federal Reserve raising interest rates, emerging economies need to stand ready to protect their respective economies by having higher interest rates, smaller budget deficits and enact measures that will boost productivity.
The US dollar depreciated against the yen overnight as the pair of USD/JPY is trading below the 50 and 100 day moving average, of 102.15 and 102.25 respectively, with the greenback under pressure due to lower US yields. The strength exhibited by the yen has been surprising as there has been a deterioration in business conditions and speculation that Japan’s Government Pension Investment Fund valued at $1.26 trillion, could make a shift in its asset allocation from Japanese bonds to domestic equities and foreign assets. With this shift, Japan’s largest public pension fund will increase its holdings of domestic and foreign stocks from 12% to 17% and foreign bond holdings will rise to 16% from 11%. The focus for the pair in the latter half of the week will be the release of US retail sales on Thursday and Friday’s Bank of Japan meeting.
In the European session, Antipodean currencies outperformed with AUD/USD reaching a one month high of 0.9398, looking to target the 94.00 handle and kiwi touching a two week high of 0.8573 with the Reserve Bank of New Zealand on deck Thursday. The euro continued its descent driven by carry trade flows while European bourses traded in negative territory after reaching multiyear highs as Lufthansa and Vallourec issued profit warnings. Lufthansa shares tumbled more than 12% as it struggles with on-going labor strikes and competition from state-owned Gulf carriers (the likes of Emirates and Etihad) and has slashed its operation profit forecast for 2014 to $1 billion Euros.
Cable has retraced yesterday’s losses, gaining 0.3% on the back of strong labor metrics. UK employment declined from 6.8% in the first quarter to 6.6% percent for the three months through April, registering its lowest levels in more than five years. The economy added 345,000 jobs bringing the fully employed to 30.54 M, and has pushed the unemployment rate to 6.6%. Annual average earning disappointed – declining to 0.7% from the previous reading of 1.9% as corporates pushed bonus payments into April to take advantage of the reduction in the top income tax bracket to 45%. The pound is vulnerable to Bank of England Governor Carney’s speech at the annual Mansion House dinner tomorrow where he is slated to speak about economic policy amid growing speculation that the central bank will enact its first rate increase before the elections in 2015.
As we head into the North American session, the economic calendar is bare and with no Fed speakers on the docket, the pair of USD/CAD is anticipated to trade in a quiet range.  US stock futures are expected to open lower as the World Banks’ growth forecast weighed on market sentiment and could provide the catalyst for investors to send the indices lower, following the highs registered by both the Dow and the S&P which has rallied 7.4% alone since April 11, amid low volumes.
Further reading:
euro continued its descent
A UK rate hike could happen already in 2014
