This week the market division wrote about US, UK and EU, with a particular focus on what is happening in Greece.
The market mover this week in US was the inflation figure – consumer prices fell 0.1% in March with respect to last year, but the core measure of inflation which strips out more volatile components like energy prices was firmer than expected at an annualized pace of 1.8%. This is the latest piece in the puzzle of contradictory economic news for the largest economy in the world, as during the week data on retail sales and industrial production also came out, both missing out on expectations. The inflation data contributed to a loss of 1% in the value of the S&P 500 index at the Friday opening, as traders focused on the solid core number that could pull forward in time the expected Fed rate hike. The index closed at 2081.18, 1% lower than at the start of the week. The move was larger in magnitude for the Nasdaq Composite, which lost 1.5% on Friday only to close again below 5000, as pictured below. As the earnings period passes by without major disruptions, it seems then that the focus for stocks is entirely on monetary policy and on the implied cost of borrowing for firms.
The impact on bonds was more muted and was mainly felt on the interest rate-sensitive two-year note, whose yield went up by 5 bps to 0.51%, while the yield on the 10-year bond went down by 1 bp to 1.87%. The entire curve is still lower by 10 to 20 bps in the belly and long-end with respect to last month, when the prospects for the US economy were less uncertain.
The firm core inflation figure was not enough to prop up the dollar index after the misses on retail sales and industrial production at the start of the week; the index lost ground from a high of 100 touched on Monday to close at 97.45 on Friday. Indeed, the US dollar is down accordingly against all major currencies, and is now trading at 1.0811 against the Euro and at 118.9 against the Yen.
Next week we will be looking out mainly for the figure on durable goods orders on Friday, which again should be read in terms of its implications for monetary policy because of their effect on stocks. The value for the month of February was below expectations, but a strong reading could support the recent uptick in consumer confidence and provide another element for the Fed to consider a rate hike in its decision.
The European stock market closed the week lower on fresh worries over Greece. Athens needs a deal to unlock the last €7.2 billion tranche of the €240bn bailout accorded in 2010. But Eurozone creditors have refused to release the funds unless the government comes up with a better-defined list of economic reforms. Furthermore, later this week the IMF rejected an informal proposal to postpone the €1bn payment due in early May, heightening operators’ fears that Greece will be unable to respect the debt schedule and will be forced to default on some of its obligations. Greece must repay about €1 billion in May and another €1.6 billion in June. The IMF stated a theoretical rescheduling of payment can only take place as part of a completely new bailout program. The last opportunity for Mr. Tzipras and Mr. Varoufakis to secure an agreement with the EU will be the Riga meeting on April 24th. In light of these recent developments, yields on bonds maturing in two years hit 27.141% and 10-year yield climbed 16 basis points to 12.91%.
Greece Yield Curve
This negative mood also affected the stock market. On Friday, the DAX fell by 2.6 %, slightly lower than the FTSE MIB. Conversely, Bund yields benefited from this situation as fixed income investors moved their money into heaven assets. The 10-year bund yields hit a record low of 0.07%, very close to fall below zero for the first time in history. At the same time, yields on Italian, Spanish and Portoguese 10-years bonds all climbed due to some risk-attitude.
The dollar depreciated by 0.81% against the euro, posting the most significant change of the week. After Tuesday, the euro kept this upward trend reaching a level of 1.08$/Euro. Anyway, the selling pressure on the dollar was limited as traders maintained the view that the Federal Reserve would hike rates this year despite the weaker data.
This week some important piece of data was released in UK. On Tuesday, the CPI index for the month of March matched the analysts’ expectation at 0% but more importantly it showed that core inflation was at 1%, lower than the expected 1.2%. Such lack inflation was well received by the markets as it releases pressure on the BoE in hiking interest rate. On Friday instead a detailed employment report confirmed that the UK labour market is in a very good shape. Employment rate came out at an all time high of 73.5% and the average earning index showed that wages are increasing at a pace of 1.8%. Even though the nominal increase in pay is not substantial, with the current no-inflation environment households’ purchasing power is still expanding and it represents an important driver for the UK consumption-led economy. Moreover, BoE expects the wage increases to accelerate to 3.5% by the end of the year and it will be a leading indicator of the US economy. Finally, the UK government was praised by the IMF for the UK economic plan. This may represent an important boost to the conservative party for the imminent general election. For a more detailed analysis, please read the following article.
For what concerns the UK equities, the FTSE100 performed well during the week on the back of the aforementioned positive data and it also touched an all time high at 7119 points. However, it was negatively affected on Friday by the general risk-off mood and ended the week 0.93% lower. The British Pound rebounded after last week low and ended the week 2.7% higher against the dollar at 1,498. Political uncertainties amid the imminent elections increased the Pound volatility and touched a 14 years high.
During the next week, a BoE meeting will take place. It will be crucial to understand the rate setters’ view about the current market environment.
A more in depth analysis about the elections and UK leading index, the FTSE100, can be found in this article
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