Risk appetite has seen an extension of yesterday’s positive sentiment, after the Ukrainian election of Poroshenko has helped to erode the war premium in the region causing global equities to trade with a bid-tone as traders and the UK and US return to their desks after the holiday-lengthened weekend. The overnight Asian session was a little less one-sided, with a mixed performance from Japanese and Chinese equities. The Nikkei managed to post a gain of 0.23%, but saw any exuberance capped by a Reuters article that claimed the Bank of Japan has already began planning an exit strategy from its quantitative easing program. The article cited central bankers familiar with the matter advising that with inflation showing progression and early signs the economy may have weathered the sales tax hike, Governor Kuroda would like to have a strategy outlined so as to reduce market impact and ambiguity. USDJPY is only marginally lower on the news, but did back away from the 102 level on BoJ news that tempered risk appetite.
Chinese equities didn’t fare as well as their Japanese counterparts during the overnight session, with the Shanghai Comp sinking by 0.34% after an announcement a large state-owned construction firm would be undertaking an equity offering. This raised concern from investors in the region that a number of state-owned banks and industrial firms that are in similar shape and trying to repair their balance sheets might follow suit with comparable stock sales, causing participants to scale back their exposure to Chinese equities.
The European session was relatively uneventful with a lack of market-moving headlines now that the dust has cleared from the elections over the weekend, although the major bourses are mostly in the green midway through their session as positive investor sentiment carries over fromMonday. The EUR is slightly lower against the big dollar heading into the North American cross, but not straying too far from it’s recent trading range in the low-1.36s.
As we get set for the North American open, there are a number of economic releases set to hit the wires over the course of the morning. Kicking things off was the demand for Durable Goods during the month of April in the American economy, with the numbers coming in warmer than expected with the headline reading increasing by 0.8% from March, much better than the 0.5% decline that economists had forecast. Mitigating some of the optimism from the headline reading was the fact that non-defense, ex-air orders decreased by 1.2% m/o/m, as this number is used as proxy for business investment. That being said, March’s reading for non-defense, ex-air had been upwardly revised from 2.9% to 4.7%, more than outweighing the pull-back seen in April.  All in all a pretty solid durable goods report to begin the year, which is being reflected as S&P futures grind to new all-time highs, treasury yields tick higher, and the DXY holds near the highs of the month. The Loonie had been garnering solid demand heading into the release of the durable goods numbers, but is now giving back some of its earlier gains as USDCAD pivots in the mid-1.08s.
With the durable goods report now out of the way, focus for North American traders now turns to the reading on Consumer Confidence for the month of May, with the survey expected to show that spirits of consumers remain at some of the most buoyant levels since early 2008. The median analyst forecast is for the print to hover around the 83.0 mark, and while another solid print to follow up last few decent months would bode well for the general notion a rebound in GDP growth is in the works for Q2 as the American consumer remains resilient, the areas where we will need to see more robust gains are in exports and business investment, the portions of the economy that were severely constrained in the first quarter of the year.
Preparing for the next day across the Atlantic, both M3 Money Supply and Private Loan growth in the Eurozone on a y/o/y basis for the month of April are set to drop tomorrow morning. While not having as much of an influence on the European Central Bank’s decision making matrix as the flash release of the May CPI figures next Tuesday, tomorrow’s releases will still be pivotal for the outlook towards the overall prices and credit environment in the common-currency bloc.  The expectations are for money supply growth and the supply of lending to small and medium size businesses to remain essentially stagnant at 1.1% and -2.1% respectively, continuing to reinforce the notion that price levels are going nowhere fast.  Though Draghi did mention yesterday that a full-blown QE-style program could be introduced as early as next meeting if the expectations from the board are that inflation will undershoot the ECB’s target for a sustained length of time, we think it might be too early for the ECB to consider a large scale quantitative easing operation, given the reluctance of some board members, the nuances of the EU charter, and the fact Draghi has over-promised and under-delivered on numerous occasions in the past.
That being said, I think Draghi is aware that he has indeed painted the ECB into a corner, and market participants are awaiting more pronounced action than just another interest rate cut. This leaves us favouring action from the ECB that not only cuts key borrowing and lending rates, but also introduces a program that purchases ABS off banks’ balance sheets in order to ease credit supply constraints to SMEs.  Regardless, corporates that have exposure to the EUR should make sure to speak to their dealing teams over the next week, as the upcoming economic releases will determine how the market positions itself heading into next Thursday’sannouncement, and where the fat-tail risks lie with the potential paths the ECB could take.
Further reading:
The EU changes its tone
Draghi
