MORNING BID – European Deflation

Aug 28, 2014 14:16 UTC

Never say the Europeans aren’t cautious. The dollar has been on a roll of late, in part because of the market’s growing expectation for more stimulus from the European Central Bank before long that would include some kind of larger-scale quantitative easing program after a speech last week from Mario Draghi that European markets seem to still be reacting to several days later. Reuters, however, reported that the ECB isn’t quite likely to do move quite so fast (heard this one before) and that took some of the wind out of the dollar’s sails and boosted the euro a bit.

Some of the move in the euro will depend on the trend in European yields, where everything is going down – German Bunds continue to make their way rapidly toward zero, and Bund futures remain in an overwhelming bullish trend, per data from Bank of America-Merrill Lynch. Analysts there also anticipate the dollar is going to experience some kind of medium-term correction – but remains in rally mode otherwise. There’s a headwind there for equities from that – rising greenback makes U.S. goods more expensive, but the gains are still only in earlier stages, and haven’t pushed into territory that would otherwise indicate surprising strength that we haven’t seen in some time.

What’s happening in part is that there’s been a definitive change in how bond markets are viewed – even the peripheral markets like Spain and Italy are less favorable as investments when compared with the United States; Merrill analysts foresee more of a move into U.S. fixed income assets after several months of seeing European funds garner strong inflows (the count is $158 billion to $86 billion, favor the Europeans so far this year). So what’s going on here? Many investors have been perpetually frightened of “catching a falling knife,” and the number of big-name bond managers who have shied away from Treasuries on the assumption that the Fed was going to declare the party over in due course are a great many. “The perceived tail risk associated with Eurozone bonds is lower than that for U.S. bonds,” they write.

Then again, this year has been a class study in foiled expectations, particularly in the bond market. Rates have remained stubbornly low; the bullish investors in the government market have reaped big rewards, and even if the U.S. dollar creeps higher, the ongoing interest out of pension funds for higher yielding credit will continue to pressure yields. And Merrill sees more buying in the bond market from foreigners, an increasing percentage of that from Europe and other investors. That should again benefit the dollar, which is expected to stay near where it is.

Morning Bid: Dollar Bills and Dollar Bulls

Jan 9, 2014 13:58 UTC

The dollar’s performance hasn’t been anything to write home about in the last few years. It has weakened against major currencies like the euro and the Swiss franc, and been held back by lower interest rates thanks to the Federal Reserve’s triple-dose of quantitative easing, but there’s been a turn of late, though it’s too early to say whether it will have lasting power.

In 2013, the dollar was at least better than the yen, amassing a 35 percent move against the Japanese currency, which countered the Fed’s QE with Abenomics and a massive monetary dose of its own.

Now in 2014, the U.S. dollar index – measuring the dollar against six currencies, including the euro, yen, and pound – has reached a six-week high, and those expecting a steady move higher in interest rates wouldn’t be out of line to expect the dollar to appreciate, along with bond yields. It didn’t happen in 2013, which is sort of counterintuitive – higher rates would seem to be a boon for the buck, but the volatility exhibited in the Treasury market was too much for the dollar types.

That’s probably not going to be the case this year, according to Jens Nordvig, strategist at Nomura. He notes that if volatility is relatively low as rates go up, that’ll support dollar appreciation against the big currencies, other than yen. His firm is also going short the euro against the Mexican peso, with the latter benefiting from U.S. growth and the former still struggling.

Flows into the U.S. from overseas have been strengthening, which helps the dollar story, and it wouldn’t be surprising to see additional strength in the greenback if jobs figures are better than anticipated, as suggested by the ADP figures (even though they come with their own problems).

The dollar’s gains come at a time when long dollar bets have fallen to their lowest levels since November, perhaps out of concern the recent run has been fueled by too much optimism.
Speculators are net short in the yen, Aussie, and Canadian dollar, but they’re still long the euro, pound, Swiss franc, peso and the New Zealand dollar (known as the kiwi, or the “Peter Jackson,” if you’re into Tolkien).

The jobs data could force more of those positions in the direction of the U.S. currency. Oddly, the steady rise in U.S. rates wasn’t much of a catalyst for the dollar in the mid-1990s, and it was only later that the dollar picked up, Morgan Stanley researchers noted in a recent report.

While various emerging markets aren’t the disasters they were in the 1990s, the private sector depends a lot on dollar funding. And if borrowing costs are rising and growth isn’t quite what it was, those flows aren’t going to be robust as in the past – particularly with the Fed cutting its massive stimulus. Taken in total, it bodes well for the buck, but only if there’s an ongoing sense of improvement, which will be something to watch for on Friday.

RETAILERS, DISCOUNTS AND DEMAND
The last of the same-store sales figures, meanwhile, are coming out, including the likes of Costco, The Gap and L Brands, and all of the good cheer reported at this higher level (better consumer spending and hiring trends, more positive sentiment) seems to have eluded the retailers. Indeed, they mostly say things stink, either because of surprises in the calendar, cold weather (and it’s been damned cold, so we’ll let that one go), and lots of promotions that promise almost everything just to lure people into the store.

Consumer discretionary shares were among the best performers in the S&P 500 last year, but repeating that trick won’t be easy. L Brand cut its earnings forecast for the holiday quarter after its lousy numbers, and Family Dollar and Zumiez also cut estimates in response to their weak showing.  One thing we’re sure of – few are going the JC Penney route, in tersely saying that the company is “pleased with its performance for the holiday period, showing continued progress in its turnaround efforts,” without offering, y’know, any numbers or anything.

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