- China again registers a record high trade surplus
- ECB formally begins its QE bond-buying program
- Eurozone finance ministers meet to discuss the Greek reform program
- EUR hovers atop 11-year lows
Historically, the first full-trading day after a U.S. nonfarm payrolls (NFP) release tends to be the quietest trading day of the month. So far, the start to this week in capital markets is rather anticlimactic when compared to the last five business days. The initial euphoria witnessed after last Friday’s better-than-expected NFP report (+295,000 jobs and a +5.5% unemployment rate) has been replaced with caution. Investors are beginning to fret that the reality of higher U.S. rates will stymie the relative free ride that the market has come to expect from today’s global low-rate environment.
In the overnight session, global equities are managing to track the selloff in the U.S. after Friday’s positive jobs report further fueled expectations that the Federal Reserve will commence a tighter monetary policy sooner rather than later. A percentage of the market is already pricing in a Fed June rate hike, however, that meeting may come too soon. Nevertheless, expect investors to focus on next week’s two-day Federal Open Market Committee meeting that starts on March 17. Will Chair Janet Yellen and her fellow policymakers alter the Fed’s current language? Even though Yellen indicated she would not adhere to any timetable for future rate hikes, dropping “patience” will have a higher percentage of investors turning their attention to a June hike, rather than further out the curve.
German Bunds are the Market’s Beacon
Euro stocks have garnered a large percentage of their support this year once the European Central Bank (ECB) announced its quantitative easing (QE) intentions back in late January. Now that President Mario Draghi and company’s bond-buying program officially begins today, will investors who have bought the ‘rumor’ consider selling the ‘fact?’ On the first day of the program, European officials have been reported buying German, French, and Belgium bonds this morning — this is allowing the rally on euro bonds to be extended.
Investors should follow the German 10-year bund for greater clarity. With record low yields, even negative yields will remain the order of the day within the eurozone fixed-income class. Do not be surprised to see German 10-year product finally trading through zero and into negative territory with the ECB’s deposit rate acting as the floor (-0.2%). It’s only then things will become interesting in the eurozone bond market.
The market continues to expect the semi-core bond markets of Austria, the Netherlands, and Finland to follow the move lower on German bund yields. Currently, the peripheral bond market spreads are sharply wider than their pre-crisis average. Do not be surprised to see the market attempt to tighten those spreads. From the ECB’s perspective, it’s always easier to deliver a stronger impact when there is uncertainty over the reaction function. As markets become accustom to QE and learn the rules of the game, it will be interesting to see if the ECB and other national central banks across the euro region will change the way in which QE is being implemented. For now, it’s the blind leading the blind.
China Remains on Soft Ground
In the overnight session, the Chinese markets have managed to lead the regional decline with their own mixed February trade data. Although the world’s second-largest economy managed to post a record high surplus ($60.6 billion versus $10.8 billion), the import numbers decline has exceeded market expectations and solidified the largest drop in a half a dozen years. A near +50% rise in exports was also indicative of the data being distorted by the seasonality of off-month Lunar New Year timing. The decline in demand for basic material components of the trade numbers further underscores China’s slowing economy: imports of iron ore were down +14% and crude oil down +9% on the year.
Reports like these are reason enough why the People’s Bank of China cut interest rates last week. Are investors witnessing the beginning of an easing Chinese rate cycle? Over the weekend, even China’s Premier Li Keqiang indicated that there is more room for further stimulus measures if economic challenges persist. Investors need to keep a close eye on Australasian currency pairs (AUD, NZD in particular). Despite the Reserve Bank of Australia’s questionable “one and done” easing policy this year, the AUD looks vulnerable. So far this week, the AUD/USD remains under pressure and has since fallen to a new one-month low below A$0.7700, while the Kiwi dollar is also under pressure, down -30 pips to around $0.7365.
EUR in Need of Support
Last week’s U.S. jobs data has been able to boost the dollar’s standing across the board. The “overextended and highly concentrated” trade remains the only trade in town, according to the market. The dollar’s interest rate differentials are pressuring the 19-member single currency to continue to plumb the depths of its new 11-year record lows outright. The market is also waiting to take its cue from today’s Eurogroup finance ministers meeting. It’s there that European politicians are discussing reform proposals submitted last week by the Greek government as it bids to unlock further financial aid.
At the moment, the EUR’s weakness has more to do with the dollar’s strength rather than Greece. The market needs a good reason to veer off target — a September 2003 EUR low of €1.0767.
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