Has the US Dollar formed a bottom?

  • The US Dollar has started the 2nd quarter as one of the strongest FX performers after weakening for five consecutive months, represented by the US Dollar Index which broke above its  2017 trendline. But the current USD strength was initiated mostly due to bad news elsewhere relative to the US, and thus, a further US Dollar appreciation depends on:
    • The ECB holds a policy meeting tomorrow amid some weaknesses in the economy. While those setbacks might not alter the central bank’s rate path at this point, the euro will be vulnerable to dovish comments or any signs that suggest the soft patches were not all about an unusually cold winter
    • The BOJ publishes its new growth and inflation forecasts at its meeting on Friday, and speculation in the market is that it may have to once again push back expectations on when price growth will reach its target
    • Sterling has wilted, having touched a post-Brexit-vote high on April 17, after BOE Governor Mark Carney hinted a rate increase next month is not a done deal. He acknowledged recent soft economic numbers, which may not be just fallout from storms and snow
    • Australia’s inflation rose less than forecasts in 1Q and stayed below target, according to data today, defying upward pressures from a softer Aussie dollar and higher commodity prices. Traders are pricing in just a one-in-three chance of a rate hike this year (Bloomberg)

The Daily View – 25. April 2018

  • Overnight, the US Dollar traded mostly stronger against its G10 peers, particularly against AUD and NZD
  • 10y UST yields bounced off of 3% on Tuesday but came back and was pretty much at 3% at the close in the US
  • Oil prices on Wednesday fell back from more than three-year highs, after the API reported that inventories rose by 1.099 mn barrels last week, compared to expectations for a 2.648 mn barrel decline
  • The Dow Jones declined quite sharply on Tuesday as a warning from Caterpillar and higher US bond yields weighed on the market. Caterpillar warned that margins may have peaked in the first quarter due to rising manufacturing costs. Not surprisingly, Asian stock markets have also been trading on the weak side
  • US President Donald Trump said on Tuesday that talks on a revised Nafta deal are “doing very nicely” as ministers from the US, Mexico and Canada meet in Washington to try to push for an agreement by early May

German Ifo business climate extends drop – fall to 102.1 more than expected

  • IFO business climate index dropped sharper than expected with both IFO expectations index and IFO current assessment index below estimates
  • Some of today’s prints must be analysed critically, as the IFO Institute has revamped the index calcuations to reflect the growing importance of Germany’s services industry. And since manufacturing is still Germany’s economic engine, it is not surprising that this adjustment negatively affects the final numbers
  • Nevertheless, the ongoing trend of weak European economic figures could increase the downside pressure on the Euro, similar to 2008, 2011 and 2014

The Daily View – 24. April 2018

  • The US Dollar Index initially rose during Asian hours, however changed course due to Australia Q1 CPI data. Headline AUD CPI numbers came in slightly lower, but very much in line with expectations. AUD had a quick drop towards 0.7575, but profit-taking lead the way back towards where we left yesterday. The biggest winner in this environment has been AUDNZD. The cross finally broke through 1.0670 and is now testing 1.0700 and 1.0750 soon
  • USDJPY, a noted gainer overnight, traded within 108.67/87 range amid subdued flows. Recovery in Nikkei towards the afternoon session had little impact
  • U.S. stock-index futures rose, while the dollar and Treasuries were mostly steady after 10-year bond yields came within a hair of 3%
  • Tokyo shares climbed on a weaker yen, while Chinese and Hong Kong stocks also gained
  • Aluminum continued its plunge after the U.S. softened its position on Rusal
  • Brent rose for a sixth day
  • Gold was marginally higher

The macro implications of the metals squeeze

  • The aluminum squeeze may be driven by micro factors, but that doesn’t mean that it won’t have macro consequences, particularly given how the rest of the base metal complex has risen in sympathy
  • Yesterday Bill Dudley said that there was no real need for the Fed to be more aggressive given that inflation remains below target, but he knows as well as you do that both core and headline PCE inflation will be 2% or higher when they’re reported at the end of the month. Moreover, the commodity move suggests upside risks moving forward
  • Trends in base metals have had a pretty solid relationship with headline inflation over the last decade, and the recent spike suggests further upside risk to inflation figures, particularly when combined with the oil price surge. That in turn may eventually encourage the market to test just how relaxed the FOMC would be with above-target inflation and tight labor markets

Option market suggests short-term top for GBPUSD

  • GBPUSD 1-month risk reversal option volatility was rejected at the zero level over recent days and started to move lower. This suggests that the market is expecting lower prices for cable, particular after disappointing UK CPI figures have reduced the probability of a May rate hike (odds for a rate hike next month dropped below 50%, from nearly 90% last week)
  • Thus, it is reasonable to expect a lower GBPUSD over the coming days, also in anticipation that BoE Carney will present a less hawkish statement on Thursday
  • Strategy: Outright GBPUSD short position with a target of 1.4070 (trendline support from March and April lows)

Fund managers see a relative outperformance of bonds vs equities

  • One interesting finding of BofA’s fund managers’ survey: The net percentage of investors who would like to see companies improve balance sheets, as opposed to increase capital expenditures, reached the highest since Feb 2010. Historically, that typically points to the outperformance of global bonds relative to equities
  • So, it indeed appears to be that investors are preparing to hunker down and are lowering the risk profile in their portfolio.
    That is also seen in their view on the relative performance of equity styles: A net 64% expect high-quality to outperform low-quality, up from 55% last month. A net 1% expect high momentum stocks to outperform low-momentum, down from net 22% last month

ZEW expectations erases EUR gains

  • The current situation number was basically in line with expectations at 87.9 but investor expectations for six months out was negative at -8.2, while consensus was expecting -1.0; a clear drop from March’s 5.1. This is the lowest level since September 2012 where ZEW expectations showed a print of -18.2
  • This ZEW number adds to the previous negative EUR data momentum, as outlined by below’s Citi Economic Suprise Index for the Eurozone

Commodities are becoming a Wall Street Favorite

  • Commodities do well in the mid-to-late stages of an economic cycle for reasons including demand and inflation hedging, because commodity prices usually rise when inflation is accelerating, and thus, they offer an effective protection
  • In addition, they provide the benefit of diversification as their correlation with other assets such as stocks wanes
  • Not surprisingly, the interest in gaining commodity exposure has risen among market participants. For instance, the iShares Commodities Select Strategy ETF was able to double its AuM, with very strong inflows at the beginning of April 2018

Netflix earnings beat and send stock higher

  • Netflix Inc. climbed in extended trading after adding 7.41 million subscribers in the first quarter, topping projections for 6.35 million. The company sees second-quarter additions of 6.2 million, beating the average estimate of analysts in a Bloomberg survey.
  • This earnings beat helps Netflix to extend its YTD out-performance compared to its FAANG peers (Bloomberg)