Investors get the jitters

Investors are in risk-averse mode after yesterday’s euphoric market reaction to the death of Osama bin Laden by US Special Forces. Today stocks are lower and currencies at the riskier end of the FX spectrum have come under pressure as investors remain on the side lines. The dollar has remained range-bound for the last two days, but is trading with a slight spring in its step even though the 12-month Treasury yield fell to its lowest ever level earlier today; it now yields a mere 0.17 per cent.

However, the markets shrugged this off after some weak UK economic news and reports that Portugal may need a larger bailout than the initial EUR80bn proposed last month, which has eroded support for both GBPUSD and EURUSD.

In the UK the manufacturing PMI survey for April was much weaker than expected at 54.6, down from 56.7, the downwardly revised figure for March. This is a seven-month low and suggests that the recovery in manufacturing could be losing its rhythm just as public sector cut-backs start to bite. New orders slowed, but exports were well supported. If sterling continues to lose its shine then this could be a boost to the beleaguered exports sector and may allow some fiscal room if the UK’s terms of trade start to improve, but that is a big if.

Investors have looked for any excuse to sell sterling this week. It wasn’t that long ago investors were looking for a rate rise at this Thursday’s Bank of England meeting. After a raft of weak data culminating in the disappointing bounce back in the economy in the first quarter there is now only a slim chance the BOE will hike rates before the third quarter of the year. This has caused GBPUSD to back off from 1.6700 highs and it is now close to key support at 1.6440/50. Obviously the big news is on Thursday. Not only is there a BOE meeting, but we get the PMI services sector survey for April in the morning. Due to the importance of the services sector to the UK economy, this survey has more bearing on UK growth. The market is looking for a contraction to 56.0 from 57.3.

There was one bright spot for the UK economy today. The CBI retail sales survey for last month rose more than expected to 21 from 15, but confidence remains low within the retail community and it is likely to be a tough year. Unsurprisingly this news had little impact on the pound.

While the pound is under pressure across the board the euro is more mixed. It is weaker versus the dollar after reports surfaced that Portugal’s bailout may need to be extended to EUR100billion from EUR80bn. It is questionable whether this extension would be sanctioned by Brussels due to the opposition to bailouts from some core Eurozone members including Germany and also Finland, where an anti EU political party is currently in negotiations to become involved in a coalition government. This is weighing on sentiment. Added to this, EU and IMF officials meet in Athens today so fears of a Greek debt restructuring could also rear their heads later today keeping a lid on gains for the single currency until the interest rate differential theme returns to the front of investors’ minds.

The price action in the major markets may also be a function of the dollar having fallen too far too fast. With investors choosing to take profit, today’s dollar bounce does not suggest the US currency has turned a corner. We believe that for as long as the Fed remains committed to lose monetary policy over the medium-term then the dollar downtrend should remain intact.

Gold is trading sideways today as investors try to make up their minds what the death of Osama bin Laden means for terrorist activity across the world. Yesterday the markets were in risk-on mode, but having digested the news overnight, investors are now less sure about what the future holds and what bin Laden’s death means for geopolitical stability going forward. We expect markets to remains fairly jittery today with investors willing to take some risk off the table until either a dovish Fed or strong corporate results give the risk-seekers the confidence to re-enter the market.

Elsewhere, the contrast between the US and the fast-growing emerging world was in force. India raised interest rates by 50 basis points today as it tries to fight off inflation. The larger hike than expected shows just how worried the RBI is about price pressures taking hold, although the RBI said that it expected growth to remain strong. India still has negative real interest rates (much like the US), so there is plenty more room for monetary tightening and Rupee appreciation.

Australia’s central bank kept rates on hold and was marginally more hawkish in its accompanying statement. It noted the massive boost to Australia’s terms of trade from the resource sector, but it also added that credit growth had been moderate. However, a continuing tightening of the labour market combined with rising inflationary pressures should be enough for the RBA to hike rates by the middle of the summer. The Aussie dollar has retreated quite sharply across the board as investors step away from risk. AUDUSD is back below 1.0900 after hitting 1.10. We mentioned last week that investors may choose to take profit at 1.10, and we could pause for a while before the Aussie continues its uptrend.

Elsewhere, silver is range bound between $44 and $45.50 per ounce and oil is moderately lower. Commodities could trade softly today if the dollar maintains its upward bias.

Source: Forex.com

03.05.2011