• Sentiment-based Momentum Giving Way to Judicious Fundamentals
• Monetary Policy Efforts Reveals a Building Divergence in Growth and Inflation Forecasts
The sharp rally that opened this week seemed to confirm that the next wave of a five-month bull trend was underway. However, this optimistic outlook was immediately deflated when momentum failed support the transition. What is the source of this hesitation? Fundamentals. Risk appetite and broad economic growth are two separate conditions. Generally, the former follows the latter; but when speculation is involved, inconsistencies often arise. Tracking sentiment since the beginning of the year, we have seen a clear evolution from a market that was attempting to establish stability after a financial crisis to one that was expanding as idle capital returned and yield forecasts rose. At this point, the reversal is unmistakable; but then again, this does not mean it is permanent. The more traditional asset classes have cleared their highs for the year; but the drive behind this rally has certainly eased. Equities, represented by the Dow Jones Industrial Average, have stalled over the past three days. In a similar fashion, the speculative-receptive commodities market has pulled back from its own highs without a clear level of resistance overhead. Alone, these asset classes would suggest risk appetite is health, just taking a breather. However, in the currency market, the conflict is more obvious. Looking beyond the 10-month high for the carry index itself, we have seen the US-dollar based majors stall immediately after mark-wide break against the greenback. And, ensuring that this is not just the dollar break from sentiment, the yen crosses have themselves yielded ceded to resistance.
Looking at the market’s as a whole, we are left to believe that a recovery is well under way. However, the developing trend behind investments is as assured as the revival of growth – that is to say, it is still highly uncertain. It is important to separate the influences of sentiment from the true foundation of economic expansion. Clearly, data over the past half year has supported the notion that the worst of the global recession is likely past and perhaps that positive growth is on the horizon. Coming from a record-breaking recession and ongoing financial crisis, this turn would naturally bolster confidence. A sense of stability is certainly enough to draw sidelined capital back into market-based assets (and thereby inflate their values); but to promote a true bull wave, turnover has to be catalyzed by the promise of rising returns and tangible growth has to produce wealth. The global economy has not yet graduated to this phase. Growth readings to this point have merely reported a moderation in the pace of the ongoing recession. Officials from many of the world’s largest economies see expansion at or after the turn of the year. Yet, even if this milestone is reached, growth from that point is forecasted to stagnate. To this point, government spending and stimulus has been the primary engine for improvement. Policy makers may be able to keep this scaffolding in place long enough for lending to fully thaw and business investment to revive; but the consumer is the key in this equation. Now the question becomes whether those countries with positive growth (China, Australia) will fold under the pressure.
isk Appetite Provides Little Follow Through
Dollar Makes a Critical Bearish Break but Risk Appetite Provides Little Follow Through
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UPDATE 10-Oil slips as U.S. jobs data boosts dollar
U.S. July unemployment data better than expected
* Offshore crude storage up sharply in last 2 weeks (Updates with settlement prices, replaces last graph on offshore storage)
By Matthew Robinson
NEW YORK, Aug 7 (Reuters) - Oil fell from six-week highs on Friday, pressured by gains in the dollar following the release of better-than-expected U.S. job-loss numbers.
U.S. employers cut 247,000 jobs in July, far less than expected and the least in any month since last August, according to a government report, adding to optimism that the world's largest economy was turning around. [ID:nN07385157]
"The jobs report was a mixed bag for crude traders. On the one hand, it was good for fundamentals for people to be working and able to buy things," said Chris Jarvis, senior analyst at Caprock Risk Management in Hampton Falls, New Hampshire.
"But it could mean that Europe will be seen as the lagging market and get people to short the euro, and a stronger dollar longer term, and put some pressure on commodities."
U.S. crude
The drop came as the dollar gained against the euro and the yen, putting pressure on commodities denominated in the greenback. [.N] Wall Street gained following the release of the U.S. jobs data.
The economic crisis has damped fuel demand, pushing crude from record highs near $150 a barrel in July 2008 to below $33 a barrel in December.
Oil prices have found support from optimism that a potential turnaround in the economy could boost flagging fuel consumption, although global inventories of crude remain high, especially in top consumer the United States. [EIA/S]
Several industry sources estimated that there were 70 million barrels of crude oil being stored at sea. While the estimates vary from around 60 million to 100 million barrels, most sources agree offshore storage levels rose by around 10 million barrels in the last two weeks alone.New Zealand Dollar to Fall for Fourth Week, RBNZ to Cut 50bp to 2.50%
Fundamental Outlook For New Zealand Dollar: Bearish
- New Zealand credit card spending falls at record-pace in March
- IMF lowers global growth forecast, calls for RBNZ to ease policy further
- G7,G20 to play vital role for risk trends
The New Zealand dollar slipped lower against the greenback and the Japanese yen this week as investors curbed their appetite for high-yielding assets, and as policymakers are expected to take further steps to shore up the $128B economy, projections for a 50bp rate cut by the Reserve Bank of New Zealand is likely to weigh on the exchange rate over the following week. A Bloomberg News survey shows that 10 of the 12 economists polled forecast the RBNZ to lower the benchmark interest by half a percent to a record-low of 2.50% however, some have argued that the expansion in monetary and fiscal policy has paved the way for a recovery later this year, and are placing their bets for a 25bp rate cut and predict that the central bank will conclude its easing cycle this month. Meanwhile, others anticipate the central bank to hold a dovish policy stance over the medium-term as the outlook for growth and inflation falter, and as a result, deteriorating fundamentals paired with expectations for lower borrowing costs is likely to weigh on the NZD/USD over the near-term, and we may see the currency pair continue to retrace the advance from March in the week ahead.
Earlier this week, the International Monetary Fund lowered their growth forecast and expects the world economy to contract 1.3% this year amid an initial projection for a 0.5% drop in global activity, and went onto say that the RBNZ should take further steps to shore up the isle-nation as trade conditions falter. As the IMF expects the downturn in the global economy to intensify throughout the year, the fund forecasts GDP to contract 2.0% this year while they anticipate the growth rate to increase 0.5% in 2010, and the remarks reinforces the Organization for Economic Cooperation and Development’s call for the central bank to lower the official cash rate to 2.00% as the region faces its worst economic downturn in over three decades. However, as Governor Alan Bollard remains reluctant to overshoot the interest rate, the group has argued that the nation’s high level of short-term foreign debt ‘implies that there is little room for further fiscal expansion,’ and went onto say that ‘the much improved inflation outlook allows scope for further easing.’ Accordingly, dovish commentary following the rate decision could spark a sell-off in the kiwi-dollar but nevertheless, as risk trends continue to dictate price action in the financial markets, the G7 and the G20 meeting in Washington D.C. may help to boost market sentiment as global policymakers tackle the downturn in the world economy, and increased demands for higher risk/reward investments could the currency pair higher over the following week.
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