Mitul is the author of the forthcoming, Chronology of a Crisis, Searching Finance 2012
Unsurprisingly risk appetite improved sharply in the wake of European Central Bank (ECB) and Federal Reserve actions as well as the many other events that have passed without incident. Indeed, the long list of events including German constitutional court decision on the ESM bailout fund, and Dutch elections, did not result in any obstruction to sentiment. Instead markets have been left to digest the impact of monetary policy actions.
The Fed did not disappoint in this respect and the $40 billion per month of Mortgage Backed Securities (MBS) purchases will and already has gone a long way to spurring risk assets, combined with the impact of the ECB bond buying programme. Although there are still plenty of doubts, especially as both Spain and Italy have yet to request a formal bailout, which would enable the ECB’s bond purchases to actually begin, the market tone will be ‘risk on’ over the short term. Indeed, our risk aversion barometer has shifted decisively into risk loving territory.
Data and events this week are unlikely to change this perspective although the risk of profit taking has grown given the pace and magnitude of recent moves. Although Eurozone flash purchasing managers indices (PMI) are likely to remain in contraction territory, the German ZEW investor confidence survey is set to bounce as it reacts to recent events. US housing market data will also look encouraging revealing further signs of recovery, although US manufacturing surveys in the form of the Philly Fed and Empire surveys for September will remain weak.
There will be plenty of scrutiny on the Bank of Japan which will be under a lot pressure for more aggressive policy action to reach the 1% inflation goal, especially following the steps taken by the Fed and ECB. Nonetheless, further easing by the BoJ looks unlikely this week. Meanwhile, in the UK softer inflation data and weaker retail sales will keep the door open to further Bank of England quantitative easing.
The USD will remain on the back foot in the wake of more Fed QE, but the USD index will find some support around the beginning of May low around 78.603. Notably USD short positioning has already increased sharply over recent weeks, suggesting that at least some of the Fed’s QE is in the price. Conversely EUR short positions have been cut sharply and while the momentum in EUR/USD is still to the upside, it will face resistance around the 1.3180. As long as there is not a sharp correction higher in peripheral bond yields, the EUR should remain supported.
About Mitul Kotecha
I have worked in the financial industry as a strategist/economist for over 16-years in several corporate and investment banks in London. I have covered a range of financial products including bonds, interest rates, equities and foreign exchange.
I am currently working in Hong Kong for Crédit Agricole Corporate & Investment Bank, where I am the head of global currency strategy, in charge of a team of analysts providing research and strategy for the bank’s clients and internal trading and sales teams.
I hold an honours degree in economics and a masters degree in economics and finance and have developed a comprehensive knowledge of economic and financial theory during my studies and in my employment.
I am regularly consulted by the press/media for my views on markets and economies appearing regularly on business channels such as CNBC, Bloomberg TV, Channel News Asia, and Reuters TV. I am also regularly quoted in various newspapers including the Financial Times and Wall St. Journal as well as various newswires including Reuters, Bloomberg, Associated Press, Dow Jones and many others.