North American stocks started the week on unsure footing, spooked by statements from Carl Icahn that equity markets could be in for a significant drop, while Federal Reserve President of New York Bill Dudley tried to perfect talking out of both sides of his mouth by relaying he was more hopeful on the US recovery because of recent data points, but it could be a long time after winding down QE before the Fed looks to raise interest rates. The fallout saw the S&P slid 0.37% while the Dow managed to finish the day essentially unchanged, just shy of the 16,000 mark. The initial Loonie strength from early in the session on the back of optimistic reform promises from the conclusion of the Chinese Third Plenum was retraced throughout the day, with the next major catalyst for Loonie traders coming in the form of the FOMC minutes from the October meeting which are due to be released on Wednesday.
The overnight session began with the release of the minutes from the Reserve Bank of Australia’s latest monetary policy meeting, where the central bank decided to keep the overnight cash rate on hold at 2.5%. The minutes failed to garner much attention immediately after the release, with the Board continuing to highlight they do have room to maneuver rates lower in order to bolster the recovery if required, while reiterating the Aussie remained “uncomfortably” high and that it would be preferential for a lower exchange rate to support growth in the economy. The AUDUSD was essentially unchanged after the minutes; however, they serve as a reminder of the jawboning tactic the RBA is currently pursuing in hopes of driving the Aussie lower. While a delay in tapering and a Yellen-led Federal Reserve may have bought the Antipodean currency a little more time in the sun, the central bank would be much happier with a lower value for its domestic unit, and would be unlikely to put up a fight should the beginning in a reduction of monetary stimulus in the US spark a capital flight that drives the Aussie lower from its current levels. Corporates long AUD that have been hoping this quarter’s price action has been a blip in the radar and the recovery will continue, may want to think about taking some exposure off the table, as there could be further to fall as growth in the near term is constrained by the high level of exchange. In the absence of telegraphing another cut of the lending rate was imminent, the Aussie is finding a bid as we transition into the North American open, moving north of the 0.9400 level.
Asian equity markets displayed soft price action throughout their session, with the Nikkei and Shanghai Comp both finishing in the red by 0.25% and 0.19% respectively. China’s Zhou elaborated on the reforms agreed to after the Third Plenum by reiterating the PBOC’s commitment to gradually expanding the CNY trading band and removing itself from day-to-day involvement in the domestic currency market in order to make the yuan more flexible, however there was no additional information in regards to a timeline.
Turning our attention to the common-currency bloc across the Atlantic, the survey on economic sentiment in Germany conducted by the ZEW institute was released overnight. Expectations had been for the November reading to increase to 54.0 from the 52.8 that was registered in October, but an upside surprise saw the official print come in at 54.6; the highest level since October 2009. Somewhat mitigating the positive headline reading was the fact that the current economic situation dropped from 29.7 to 28.7, missing the 31.0 analysts had been expecting. The positive headline reading is an optimistic sign for the Eurozone going forward, although the follow-through effects of the boost in confidence will be what really counts, as it has been proven that an uneven growth trajectory for the industrial juggernaut is insufficient to lift the struggling periphery nations along with it. There has been chatter from ECB board members that unconventional monetary policy options exist after rates have been effectively lowered to zero, although the members have shied away from recommending those measures at this point, reiterating the situation is not that dire just yet. The EUR is slightly lower against the big dollar after the release, retracing its overnight march higher and is now trying to retain its hold on the 1.3500 level.
As we head into the North American open, equity futures are trading with a slight offered tone, making it slightly more challenging for the S&P to move convincingly past the psychological level of 1,500. Generally speaking, market sentiment could be characterized as having modest “risk-off” feel this morning, with global equities pointing lower and the front-month WTI futures slip below $93/barrel. The Loonie was weaker overnight against the USD, but is mounting a charge to make it back to unchanged in mid-1.04s as we get set for the opening bell.
The economic calendar remains fairly light for North America today, however there are a number of Fed speakers that will most certainly garner some attention from capital markets participants. Both Dudley and Evans are on the speaking docket today, with the outgoing Fed chair Bernanke on tap later in the evening. Depending on the strength of the comments from the Fed members it is likely that we could see some position jockeying ahead of the Fed minutes due Wednesday afternoon, but it is doubtful we will see any earth-shattering comments after the confirmation for the continuation of Fed policy once Yellen takes the reigns in 2014.
One the economic data front, inflation figures for the month of October are due outtomorrow morning, with expectations to see a slight uptick of 0.1% on a monthly basis, while the comparison over the last twelve months show prices increasing by 1.0%. The expectations for a continuation of soft consumer prices will likely increase the FOMC’s confidence more is needed to be done to boost inflation and reheat the labour market – with a print matching the median analyst forecast signaling there is no rush on the Fed’s part to pare back its asset purchases.
Further reading:
Forex Analysis: GBP/USD Poised to Break Two-Month Trading Range
EUR/USD Nov. 19 – Little Movement After Mixed Economic Sentiment Releases
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