While global equities were able to dodge most of the pessimistic sentiment surrounding the Syriza victory in Greece yesterday, the modest optimism has since faded, with stocks retreating as investors look to rotate out of high-yielding assets. A string of fourth quarter earnings disappointments from multi-national conglomerates listed in the US due to currency volatility during the latter half of 2014 has led to soft equity performance this morning, with Proctor and Gamble the latest firm to report both revenue and earnings that missed forecasts. The productivity progress P&G made was “not enough to overcome foreign exchange” as the greenback appreciated against a broad basket of currencies and thus devalued international earnings. Multinational corporations are starting to awaken to the fact that currency market volatility is likely here to stay due to the fluid nature of monetary policy around the globe, however, those not prepared for the sharp appreciation of the greenback are left playing catch up and will continue to be faced with a challenging 2015 as foreign exchange continues to impact sales and net earnings for US companies.
Illustrating the fact that currency market volatility will continue to permeate through financial markets in 2015 were the moves in the Swiss Franc overnight, as the swissy weakened the most against the euro since the SNB abandoned their peg, with EURCHF ramping into the high-1.03s. The impetus for the move was a member of the SNB asserted the value of Franc was overvalued, and that the central bank stood ready to intervene in foreign exchange markets. Whether the dramatic drop in the value of the swissy was in fact intervention from the SNB or puffery that spurred a short-covering rally in the euro, the majority of the move was soon faded, with EURCHF reversing its overnight gains as the pair sank back in the mid-1.01s.
The major macroeconomic data point that was released overnight was the preliminary estimate of fourth quarter GDP in the UK. The numbers showed there was a modest slowing for the UK economy in Q4, with the q/o/q pace of growth printing at 0.5%, down from 0.7% in Q3 and the 0.6% that analysts had forecast heading into the report. The annualized figure at 2.7% is still strong, though the slight disappointment continues to feed into sentiment the Bank of England may have some leniency before raising rates, echoing last week’s MPC vote breakdown which saw the two interest rate hawks capitulate and abandon their calls for immediate rate hikes. The pound initially slipped against the greenback after the news, though GBPUSD is charging higher heading into the North American cross as the big dollar consolidates and the pair moves back into the 1.51s.
Heading into the North American open, the overnight weakness in equity futures on the back of weak earnings has accelerated, telegraphing the S&P will open sharply lower once the bell rings. Front-month WTI futures have managed to hold onto the $45 handle this morning, and combined with the consolidation in the DXY has moved USDCAD back away from the psychologically important 1.25 level. USDCAD knocking on 1.25s door is likely to get louder in the short-term, and we still favour USDCAD a buy on dips as the divergence in monetary policy between the BoC and Fed accelerates. Also likely to keep USDCAD underpinned in the short-term is the deal RBC struck to buy L.A. based City National Corp for $5.4bn in order to add to broaden out their wealth management business. The roughly half cash and half stock deal will likely keep a bid under the greenback due to funding of the acquisition.
Also released this morning were durable goods orders for the US over the month of December, and across the board the result was ugly. Not only were November’s numbers revised to show deeper slowdowns from October, but orders in Decembers slipped further, with both headline and core drastically missing expectations. In addition, the proxy for business investment (non-defense, ex-air) dropped by 0.6% over the month of December, a wide miss of the 0.5% increase economists had forecast, along with matching the pace of decline witnessed in November. The fallout from the ugly durable goods data has been increased pressure on already sharp losses in S&P futures, while the DXY slips further as the risk for downside revisions to Q4 GDP growth in the US heightens.
Further reading:
US Durable goods orders plunge 3.4%, core -0.8% – USD down
EUR/USD set for parity at year end, 0.90 at end 2016 – collapse justified – ING
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