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Risk appetite has seen an extension of yesterday’s positive sentiment, after the Ukrainian election of Poroshenko has helped to erode the war premium in the region causing global equities to trade with a bid-tone as traders and the UK and US return to their desks after the holiday-lengthened weekend.   The  overnight Asian session was a little less one-sided, with  a mixed performance from Japanese and Chinese  equities.   The Nikkei managed to post a gain of 0.23%, but saw  any  exuberance capped by a Reuters article  that claimed the Bank of Japan has already began planning an exit strategy from its quantitative easing program.   The article  cited  central bankers familiar with the  matter  advising that with inflation showing progression and early signs the economy may have weathered  the sales tax hike, Governor Kuroda would like to have a strategy outlined so as to reduce market impact and ambiguity.   USDJPY is only marginally lower on the news, but did back away from the 102 level on BoJ news that tempered risk appetite.

Chinese equities didn’t fare  as well as their  Japanese counterparts during the overnight session,  with  the Shanghai Comp sinking  by 0.34% after an announcement  a large state-owned construction firm would be  undertaking an equity offering.   This raised concern from investors in the region that a number of state-owned banks and  industrial firms that are in similar shape and trying to repair their balance sheets might follow suit with comparable stock sales, causing  participants to  scale back their exposure to Chinese equities.

The European session was relatively uneventful with a lack of  market-moving headlines now that the dust has cleared from the elections over the weekend, although the major bourses are mostly in the green midway through their session as positive investor sentiment carries over fromMonday.   The EUR is slightly lower against the  big dollar heading into the North American cross, but not straying too far from it’s recent trading range in the low-1.36s.

As we get set for the North American open, there are a number of economic releases set to hit the wires over the course of the morning.   Kicking things off was the  demand for Durable  Goods  during the month of April  in the American economy, with the numbers coming in warmer than expected with the headline reading increasing by 0.8% from March,  much better than the 0.5% decline that economists had forecast.   Mitigating some of the optimism from the  headline reading was the fact that non-defense, ex-air orders decreased by 1.2% m/o/m, as this number is used as  proxy for business investment.   That being said, March’s reading for non-defense, ex-air had been upwardly revised from 2.9% to 4.7%, more than  outweighing the pull-back seen in April.    All in all a pretty solid  durable goods report to begin the year, which is being  reflected  as S&P futures grind to new all-time highs, treasury  yields tick higher, and the DXY holds near the highs of the month.   The Loonie had been  garnering solid demand heading into the release of the  durable goods numbers, but is now giving back some of its earlier gains as USDCAD pivots in the mid-1.08s.

With the durable goods report now out of the way, focus for North American traders now turns to the reading on Consumer Confidence  for the month of May, with the  survey expected to show that  spirits of consumers remain at some of the  most buoyant levels since early 2008.   The median analyst forecast is for the print to  hover around the 83.0 mark, and while another solid print to follow up last few decent months would bode  well for the general notion a rebound in GDP growth is in the works for Q2 as the American consumer remains resilient, the areas where we will need to see  more robust gains are in exports and business investment, the  portions of the economy  that were severely constrained in the first quarter of the year.

Preparing for the next day across the Atlantic, both M3 Money Supply  and Private Loan growth in the Eurozone  on a  y/o/y basis for the month of  April are set to drop  tomorrow  morning.   While not having as much of an influence on the European Central  Bank’s decision making matrix as the flash release of  the May CPI figures  next Tuesday,  tomorrow’s  releases will still be pivotal  for the outlook towards the overall  prices and credit  environment in the common-currency bloc.    The expectations are for money supply growth and the  supply of lending to small and medium size businesses to remain  essentially stagnant at 1.1% and -2.1% respectively, continuing to reinforce the notion that price levels  are going nowhere fast.    Though Draghi did mention yesterday that a full-blown QE-style program could be introduced as early as next  meeting if  the expectations from the board are that inflation will undershoot the ECB’s target for a sustained length of time, we think it might be too early for the ECB to consider a large scale  quantitative easing operation, given the reluctance of some board members, the nuances of the EU charter, and the fact  Draghi has over-promised and under-delivered on numerous  occasions in the past.

That being said, I think  Draghi is aware that he has indeed painted the ECB into a corner, and  market participants are awaiting more pronounced action than just another interest rate cut.   This leaves us favouring action from the ECB that not only cuts key  borrowing and lending rates, but also introduces a program that purchases ABS off banks’ balance sheets in order to  ease credit  supply constraints to SMEs.     Regardless,  corporates that have exposure to the EUR should make sure to speak to their dealing teams over the next week, as the upcoming economic releases will determine how the market  positions itself heading into  next Thursday’sannouncement, and where the fat-tail risks lie with the potential paths the  ECB could take.

Further reading:

The EU changes its tone

EUR/USD – Steady As Draghi Hints At Action From ECB