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Buoyed by more optimistic IMF global growth forecasts for 2012 and increasing speculation that Beijing will soon take further steps to ease financial conditions, the appetite for risk has suddenly improved.

Also contributing to the more positive tone was some decent earnings news out of the US from the likes of Coca Cola overnight, some encouraging growth news out of Germany and acceptable auctions in Europe, notably Spain. Video:

Apple shares surged 5% amid hopes that next week’s earnings will reveal strong demand for iPads. In addition, the falling price of Brent crude is helping to soothe nerves. In Europe, the Euro Stoxx 50 jumped nearly 3% and is now back in the black for the year to date, while the S&P was up 1.6%, its best performance for a month.

Guest post by Forex Broker FxPro

High-beta currencies such as the CAD and the Aussie did well, the latter now close to 1.04 again. Both the dollar and the Japanese yen have given back some of their recent gains.

 

Commentary

Euro whiplash. Trading the euro successfully at present is no easy task. Volumes are low, and conviction on future direction amongst traders is absent. After threatening to really crack the 1.30 level on Monday, the single currency reached 1.3170 yesterday. Those hoping for a cogent explanation for the turnaround can look away now – apart from some good old short-covering, stop-hunting and sovereign wealth fund-buying, there was little in the way of fundamental developments to account for the mood change. News that the Rajoy government will be really tough on those fiscal miscreants at the regional level helped the tone in part. Also, better-reasoned analysis of the funding situation in Spain suggests that the country might muddle through. As a sovereign, Spain is roughly 50% pre-funded. Also, most Spanish banks have still not used their LTRO money, the ECB is considering the purchase of Spanish bonds as part of its SMP, European leaders have bolstered the size of their firewall to around EUR 800bn and the IMF may yet be prevailed upon to supply additional funds. The latest auctions in Belgium, Greece and Spain were satisfactory, while the German ZEW reached a two-year high and was above expectations. There has also been talk that the SNB has been a discreet buyer in an attempt to protect the 1.20 ceiling.

UK inflation still uncomfortably high. For the second consecutive month, the UK inflation numbers came in above expectations, the March release showing headline inflation rising to 3.5% (from 3.4%) and core inflation up to 2.5% (from 2.4%). Furthermore, if we compare yesterday’s numbers to the expectations of the Bank back in November, it is clear that the pace of decline in headline prices has not been as quick as it projected back then. The reason this time around appears to be stronger inflationary forces on the high street, with food prices adding 0.1% to the increase in headline prices and clothing and footwear adding 0.08%. The increase in clothing and footwear was the largest monthly increase ever seen. Offsetting these rises were household fuel prices (falling this year, rising last year), whilst transport costs that were also pulling the headline rate lower, thanks to weaker prices for second hand cars. So after peaking at 5.2%, the good news is that inflation has fallen substantially (but that was easy, given the base effect from the Jan-11 VAT increase), but once again not as fast as anticipated.   From a wider perspective, this is worrying because if we take the start of 2008 as the base, UK prices have increased by nearly 16%, vs. 8% for the EU and US.   At the same time, UK incomes have been held back, so the household sector continues to suffer. Indeed, recent ONS data showed income per head having risen in only two of the past eight quarters in the UK. In sum, we are now once again questioning the BoE’s inflation-forecasting record, which was already under close scrutiny for consistently underestimating the inflationary spurt of recent years.   For the UK, easing policy when inflation has consistently over-shot the target has not been a comfortable or easy task for the BoE.

Lower oil price a welcome relief. Deserving of more attention is the sharp decline so far this month in the price of Brent crude. In the past two weeks it has declined by almost USD 7 a barrel to USD 119. That said, for the year to date the oil price is still up by USD 11 a barrel. Numerous factors account for the recent retreat in the price of black gold. Those tensions regarding Iran and the threatened closure of the Straits of Hormuz have subsided for now, although they could return very quickly. Saudi Arabia has made it clear that it wants the oil price back nearer USD 100 and has stated that it is prepared to pump plenty more in order to achieve this target. Concern that European growth is weakening has weighed on the price as well. In addition, some oil traders have been closing out long spread positions in Brent crude vs. WTI – the Brent/WTI spread has narrowed from USD 21 to USD 15 over the past two weeks. For Europe’s embattled economies, the hope is that this decline in the oil price persists and soon feeds through to lower prices on the forecourt. Europe desperately needs the price of Brent crude to fall back to nearer USD 100.