After nearly five weeks of continuous gains equity markets seem to be losing steam as the pace of gains seen in Asia, Europe and on equity futures on S&P 500 weaken and flat line. It all began with an abrupt return to risk sentiment as expanded quantitative easing in Asia and Europe gave rise to trader’s expectations, this was further fuelled by improved inflation and employment figures out of the US economy. Alas it appears that this latest bout of bullishness may be short lived, as the Federal Reserve’s official dovishness and continued fears around the strength of global economic growth once again weigh on markets.
Kicking off in Asia, indices put in a mixed performance with Shanghai posting gains while the Nikkei took a loss while the yen slipped against the dollar. Looking to the commodity sensitive Australian and New Zealand dollars, trading in the pair has been relatively subdued while the favour shown commodity prices fails to revitalize their standing against the greenback.
Looking to Europe, concerns of the United Kingdom’s potential exit from the EU have reignited weakness in the pound as its slides heavily against both the US dollar and its continental counterpart, while the cost to insure the value of the pound against further losses has jumped to a seven year high. In the Eurozone, despite the horror of yesterday’s terrorist attacks indices are showing some signs of life while Brent crude pricing has been solidified by rumours that Saudi Arabia may be prepared to join a production freeze despite Iran’s reluctance. Looking to the Euro it has gained about half a cent versus the pound while its standing against the greenback has diminished on the back of broad-based strength in its American peer.
Prior to the opening bell in New York, equity futures on the S&P suggest trading will be off to an anaemic start while the dollar index has shown broad based strength in the US dollar as it begins to gather a bid tone despite the bearishness kicked off by last week’s Fed meeting. Adding to the confusion have been recent statements by Chicago Fed president, Charles Evans, that suggest his expectations on the path of future rate increases has shifted to a more hawkish stance than they were previously. This is notable coming from one of the Fed’s most dovish members especially given continued data releases that undermine some of the arguments around continued weakness in the United States. With that said, shifting expectations on the potential rate path of the Federal Reserve has been the single largest driver of the current bout of extreme currency market fluctuations, with the confusion continuing, the stage is set for the volatility to persist.
Further reading:
GBP: Recovery Only After The EU Referendum; Where To Target? – Credit Agricole
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