So far it’s a somewhat lethargic open to the week after an intensive previous five-business days that was dominated by a number of poorly explained outcomes. It started with Lawrence Summers, Obama’s assumed team pick, surprise stepping down for Fed head consideration. By mid-week, capital markets saw US policy makers bypass a consensus “to begin” taper decision by the new ‘transparent’ Fed. Last Friday, St. Louis Fed President Bullard rounded out the week with a strong “possibility” taper was coming – all these events had the dollar bulls still licking their wounds.
This week, the market delivers clues to the investor on the state of the economies of China, the US and the Euro-zone from the September flash purchasing managers’ indices. Again, any Fed members slated to speak will be followed as intently overseas as in the US. The Fed still has it – even under the guise of better transparent communication – of surprising the financial markets. Last week’s FOMC meet most certainly dominated capital markets agenda, first in anticipation, then in the reality of the results, which did not meet the consensus of most expectations. Dealers and investors had merrily being pricing in a “taper lite” or “token taper” of US monthly bond purchases. However, Ben and his friends decided differently.
In hindsight, the recent market inclinations (higher equities, lower yields and a weaker dollar) had been in place for most of this month, despite a huge consensus for a tapering of QE. This would suggest that most of last weeks market move had more to do with congested positioning. Investors were positioned for a change of direction, perhaps getting ahead of the data and disregarding many of the peripheral risks?
It comes as no surprise that Chancellor’s Merkel’s Christian Democratic bloc took +41.5% compared to +25.7% for the Social Democrats in yesterday’s German federal election, according to results from all 299 districts. However, this leaves her short of a majority and needing a coalition partner to govern Europe’s biggest economy. Her recent junior coalition partner, the FDP, took +4.8%, below the +5% hurdle required to win seats in the Bundestag. The euro-skeptic Alternative fur Deutschland – AFD took +4.7%. Now it’s back to the negotiation table to figure out who is best prepared to deliver the goods to form a coalition. The European markets have shrugged off the German vote – the focus remains on the US and its economic data.
Released overnight, global data is seen as being somewhat good for the risk crowd this morning. China’s flash manufacturing PMI managed to print a 6-month high. The HSBC Flash PMI increased by +1.1p to 51.2 this month, beating consensus of 50.9. The new export-orders index increased most among the key sub-indices, by +3.5p to 50.8. Certainly an aiding factor was the new-orders index gaining further strength to reach 52.6. These index combination reflects the improvements in both domestic and external demand conditions. The early indicator is the latest in a string of economic data in recent weeks that points to a recovery in Asia’s largest economy.
Not to be outdone, activity among the euro-zone businesses picked up further this month. Is this more proof that the euro-economy continued a slow recovery in Q3? The rise in the composite index from 51.5 to 52.1 was the seventh consecutive increase. There still is no sign that businesses in the euro region are hiring more staff – record unemployment levels remain persistent and should undermine further any pick up in consumer spending and the economy as a whole. It’s not unexpected to see a pick up in the EU’s services sector while the manufactures remain ‘sluggish.’
The 17-member single currency has hardly skipped a beat in overnight trading. Some EUR stops were flushed out on the open, mostly on corp selling. The single currency seems to be adjusting nicely to these newer lofty prices outright, even with US Treasury yields edging higher. Macro bids remain around the 1.3500-10, sprinkled with a few stop-losses just beneath. The overall market trend remains bullish, with a build of EUR longs evidence after today’s PMI initial reaction. Investors ought to be wary of further Fed speeches by Dudley and Lockhart – voter or no voter, they can all make us pay!
In total this week, we have 11-Fed speakers hitting the tape:
Lockhart: 2015 voter, neutral
Dudley: voter, neutral
Fisher: 2014 voter, hawkish
Pianalto: 2014 voter, neutral
George: voter, hawkish
Stein: Governor, neutral but has expressed concerns about QE side effects in the past
Kocherlakota: 2014 voter, dovish
George: voter, hawkish
Evans: voter, dovish
Rosengren: voter, dovish
Dudley: voter, neutral
Bernanke Giveth and Bullard Taketh away
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX
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