After a few days of dollar weakness due to concerns that the Fed’s rate hike intentions have been derailed following some undisputedly ugly economic data (perhaps the Fed should just make it clear there will never be rate hikes during the winter ever again) the USD has resumed its rise, and as a result risk assets, after surging early in the overnight session driven by the Nikkei225 and the Emini, the “strong dollar is bad for risk” trade has re-emerged, with the Nikkei dropping almost 500 points off its intraday highs, with US equity futures poised to open lower once more, sliding nearly 20 points in the overnight session, and surprising the BTFDers who have not seen five consecutive days of “risk-off” in a long time.
Not helping the risk case is oil, which having soared this week on geopolitical concerns and fears the Yemen conflict may spread and closing higher for five consecutive days rebounding 13% off last Thursday’s levels with the five-day streak the highest since February 2014, has realized that there still is no excess demand, and inventory keeps building, as a result WTI has slid and is eyeing $50 support once more. According to Bloomberg, Brent, WTI fall ~$1 during early trading as fears over impact of Yemen conflict ease on low trading volume. Today we get another Baker Hughes U.S. oil rig count update, which may show the recent slowdown in rig shutterings has picked up. “Yesterday’s price rise was a knee-jerk reaction to events in Yemen and mkt participants are now making a more sober assessment of the situation,†says Commerzbank commodity strategist Carsten Fritsch. “The risk of a supply disruption resulting from Saudi-led bombing in Yemen is very small.”
An extension of the USD’s gains this morning caused another slide in EUR/USD, which first caused stops to be taken out at 1.0850 before a test of 1.0800 and EUR/GBP to fall below 0.7300. Some noted that further EUR selling could be seen into month-end as investors maintain hedge ratios for European assets that they hold, and the fall in the EUR caused a temporary lift for European stocks however the indices have drifted lower given a distinct lack of news this morning. Crude futures have seen selling overnight and into the European open as concerns over the situation in Yemen dissipate and a stronger USD caused further selling across the commodity complex, leading to a break below USD 1,200 in spot gold. This commodity selling has caused the FTSE to underperform its European peers and is the only major index in European to trade in the red.
Although Europe has been quiet with no tier 1 data releases, there will be tier 1 releases from the US with the 3rd reading of Q4 GDP due for release and is expected to be revised up to around 2.5%. Fed’s Yellen is also due on the docket and markets will be looking out for any reaction to recent speeches made by her Fed colleagues.
Asian stocks traded mixed following a lacklustre Wall Street close which saw the S&P 500 fall for a fourth consecutive session. The Nikkei 225 (-1.2%) saw some selling late on in the session as JPY strengthened for a third consecutive day, although this was not fully sustained. This also followed tame Japanese CPI data, which when discounted from last year’s sales-tax hike, printed flat for the first time since May 2013 (Y/Y 2.0% vs. Exp. 2.1% (Prev. 2.2%). Elsewhere, both the Hang Seng (-0.03%) and Shanghai Comp (+0.6%) rose after shrugging off poor earnings from PetroChina and ICBC, the latter reporting its first Q/Q profit decrease since 2011.
Gilts are seen underperforming once again this morning as focus remains firmly fixed on May’s general election but also as profit taking into the weekend is noted, and ahead of today’s March future expiry. Given the recent comments from several BoE members ahead of their self-imposed election blackout period from March 30th, and comments this morning from Governor Carney who supported the idea that the next rate move will likely to higher, short-term rates have seen a small lift. Bunds have seen no direction this morning after a quiet Asian session which saw light flows particularly ahead of the Japanese fiscal year-end.
WTI and Brent futures saw selling overnight in a pull back from yesterday’s strong rally and as concerns over the situation in Yemen begin to dissipate a little. A rally in the USD this morning has also led to selling in precious metals, leading to a break below USD 1,200/oz in spot gold and USD 17/oz in spot silver. It is worth noting there are several expiries this morning:
