Is this what the end of QE looks like?

There have been some violent moves across asset classes this morning after a perfect storm of central bank chatter, weak Chinese economic data and some large declines in Asian equities knock risk sentiment. European stocks are down 2% or more, and US stock market futures don’t look much better. The yen and CHF are higher in the FX space as risk aversion takes hold.

So what is driving these moves? It could be down to Fed Chairman Bernanke, whose testimony to Congress yesterday concentrated on the end of QE3 and the Fed’s exit strategy. Although the Fed chairman was very clear that the end of QE3 is data dependent, the stunning market rally that helped to push US markets to record highs could not sustain life at these lofty highs with the prospect of an end to cheap money and liquidity in sight. Bu this doesn’t fully explain why Japan’s Nikkei index dropped more than 7% during the Asia session, after all the Bank of Japan is only two months into its largest ever stimulus programme.

Japanese bond yields surge

The Nikkei moves are not all down to Bernanke. On Wednesday the Bank of Japan held its meeting and (unsurprisingly) did not mention any increases to its stimulus programme. But, with the benefit of hindsight, the key part of Governor Kuroda’s press conference was his ambivalent attitude to the rise in Japanese bond yields. This was a green light for bond investors to sell JGB’s yesterday, which caused the 10-year yield to hit 1% at one stage, its highest level for 12 months. Although the nominal level of yields is still low, it’s the pace of gains that are worrying for stock investors, in particular. The 10-year yield has risen three fold since the BOJ meeting in early April. For a country with more than 200% debt-to-GDP ratio, you don’t want to see volatility in bond yields.

The economic data test

So although Bernanke and his Japanese counterpart did not spell an end to their stimulus programmes, and the Fed is still purchasing Treasuries on a daily basis, this is not dovish enough for the markets. Bernanke has increased the risk around economic data releases, after he said that the timing of an exit from QE3 was dependent on economic performance. The first test will be today’s initial jobless claims data in the US, due at 1330 BST/ 0830 ET. The market expects a decline in people signing on for unemployment benefits; however watch out for any surprises. Will a weak number be market positive because it secures the future of QE3? Or will an improvement in jobless claims actually weigh on markets as it threatens the market junkies’ liquidity fix? Strong economic data does not mean more liquidity for the market; it actually means tighter monetary conditions in the future, which tends to be stock negative.

Is good data bad for the markets?

This is not as illogical as it sounds, after all the rise in US markets to record highs could have been on the back of expectations that QE3 would boost the US economy. Since markets always look to the future, the focus now could be on the prospect of better data leading to Fed tightening. Since the markets tend to lead an economic recovery, we could be in a short term topping pattern close to these record highs. We are unwilling to commit to a longer term view right now, as the US economy is still looking fragile and the data could go either way. But one thing is for sure, the markets’ eyes will be squarely on jobless claims and payrolls going forward.

G10 gets weighed down by weak Asian equities

G10 FX has taken its cue from Asian stock markets overnight and risk aversion is the name of the game. The yen and CHF are higher across the board, while the dollar is weak. The biggest mover has been USDJPY, down more than 2% so far. It is starting to look extremely over-sold; however pullbacks so far are looking shallow. The movement in the dollar (after yesterday’s period of post- Bernanke strength) could be due to positioning. The dollar has rallied through most of QE3, thus now that QE3 is coming to an end, potentially threatening US growth further down the line, risk sensitive assets like the dollar and stocks are coming under pressure. We see USDJPY trading in a range between 100.25 – 103.75 in the medium-term.

EUR has moved along with the broader market, and is higher against the US dollar. PMI readings for May were better than expected, the composite PMI rose to 47.7 from 46.9 in April, the highest level since February. However, this is still in contraction territory and suggests the currency bloc‘s recession could have extended into Q2. The Chinese HSBC manufacturing PMI disappointed expectations, which dragged the three-month average back to Dec 2012 levels. This suggests that the Chinese economic slowdown in continuing, which is negative for the Aussie. AUDUSD has been hammered this week, however after dipping below 0.9600 at one stage; this cross has benefited from the dollar decline, and is back above 0.9700. In the short term key resistance lies at 0.9755 then 0.9770. Above 0.9680 (the daily pivot) is mildly bullish in the short term for this cross.

Ahead today, US initial jobless claims and new home sales along with speeches from the ECB’s Weidmann and ECB President Draghi later this evening in Paris and London respectively, are the key fundamental events to watch out for on Thursday.

Источник: Forex.com

23.05.2013