Dollar Hobbled, Equities Bolstered by Bullard?s QE Comments

Talking Points:

• Dollar Hobbled, Equities Bolstered by Bullard’s QE Comments
• Euro Fundamental Backdrop Deteriorating Faster than Currency Suggests
• British Pound Jumps Higher after Rate Forecasts Rebound Sharply

Dollar Hobbled, Equities Bolstered by Bullard’s QE Comments

Though the capital markets aren’t collapsing, sentiment is still doused in volatility and structural concerns continue to march forward. The mixed sense of sentiment the past few trading days in other words do not imply conditions have settled nor that risk appetite has regained control. Yet, as long as the masses are not motivated by the chaos of unwinding, distractions can curb the risk aversion trend that would otherwise spark a bid for the US Dollar. This past session, just such a diversion was found in the financial headlines. The docket issued a round of encouraging economic data. Jobless claims further trended to multi-year lows, industrial production soared, TIC figures for August showed strong capital inflow and the Bloomberg Economic Expectations survey for October hit a near two-year high. All of this cumulatively speaks to a strong US outlook which could be construed as a stabilizing factor for uncertainty and reason for the Fed to keep pace in its easy policy exit.

Yet, a robust economic outlook for the United States doesn’t offer a cure to the ills the system currently faces – a global cooling, excessive leverage and imbalance of future return to its risk. Alone, this data would have like found the markets returning to a concerted equity selloff. However, St. Louis Fed President James Bullard offered traders something more aligned to their tastes. The otherwise hawkish central banker (he previously supported a first quarter 2015 rate hike) remarked that the central bank should consider delaying the end of its QE program. Any indication of ‘more stimulus’ taps the market’s stimulus-to-complacency pleasure centers. However, even if this call found a consensus, it is very unlikely that it could turn sentiment around. A small remnant of a once-massive program held out for a month or two doesn’t offset the types of issues arising in Europe, China and global geopolitics. Moving forward, the focus should remain on volatility as a constant.

Euro Fundamental Backdrop Deteriorating Faster than Currency Suggests

EURUSD slipped 0.2 percent his past session and the Euro was generally mixed through the session. Given the tumult the Euro-area’s capital markets have suffered, that is a ‘win’ for the currency. It seems the ECB was prophetic in its shift five months ago to adopt a more accommodative monetary policy. While it was initially stated as a concern for deflation – and some believe it was in least part a means for capping the exchange rate – it seems that an economic fallout was another element that needed this support. That said, it looks likeit is too little, too late. Since ECB President Draghi failed to meet the market’s demands for clarity on the asset purchase program, the financial markets started to waver. Yet, now with economic lethargy rearing and ammunition for further support nearly spent; we find the region’s equity indexes sharply lower over the weeks, Lipper fund analysis reported a record US withdrawal of $1.3 billion from European funds, and periphery yields are climbing once again. Greece’s 10-year government bond yield has surged 36 percent just this week to a 8.96 percent, 12-month high.

British Pound Jumps Higher after Rate Forecasts Rebound Sharply

For much of this week, the Sterling has come under tremendous pressure from its rapidly deteriorating rate forecast. Yet, this past session, the yield and currency were given quick reprieve. The two-year Gilt yield posted a massive 25.8 percent rally (to 0.65 percent) and the 1-year-2-year swap posted its own 16 percent climb. The Pound shared the sentiment with a universal rally against the majors – 0.4 percent USD up to 1.2 percent against the Aussie. What was the spark in this hawkish view? Neither data nor BoE commentary was especially favorable. Without something material and building, it will be difficult to feed expectations of a 1Q 2015 hike as global conditions slow. Therefore, remain cautious of this hawkish/bullish bearing. Meanwhile, next week, we have 3Q UK GDP due. The biggest impact would be a disappointment.

Yen Crosses Have Yet to Trigger Carry Deleverage

With equity markets mixed, the stubborn Yen crosses were certainly avoid a broad unwind. Yet, as the market looks for guidance, it is important to remember the underlying market conditions as well as the outlook going forward. Volatility is persistent, even if risk aversion is hesitant. That means the ‘risk’ leg of this carry participant is high while the ‘return’ finds yields are still historically low. Should next week’s growth figures confirm a weakening economic picture, it will add considerable pressure to keep these ‘expensive’ carry trades buoyant.

Australian Dollar, Chinese Renminbi Look to High Event Risk Next Week

Aussie Dollar traders will be watching the country’s 3Q CPI figures to see if there is leeway for the RBA to shift back to a more accommodative monetary policy stance as the global horizon darkens. However, if we are looking for what will truly drive the Australian – and Chinese – currency in the week ahead, it will be China’s 3Q GDP report. Will Australia’s largest trade partner continue its effort to moderate growth?

Emerging Markets Late-Session Rebound Doesn’t Curb Decline, Volume

Like equities in the Developed World, Emerging Markets measures found some modest recovery this past session. However, the trend is still persistently in the bears’ court. The MSCI Emerging Market ETF dropped another 0.9 percent on heavy volume (101 million shares) to a six month low. For FX rankings, the most liquid players suffered the worse with the Russian Ruble hitting a new record low.

Gold Traders Seem Little Heartened by Bullard’s Suggestion on QE

Maintaining stimulus in the US for a longer-than-expected period, a growing balance sheet in other countries and the possibility of a financial seizure that will send investors seeking safety. That sounds like a strong combination for gold. However, the metal posted little change on the day as speculative interest continues to drop. It seems liquidity and a hold out for yield make situation just different enough.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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