Weekly Radar: Bernanke, Berlusconi and bumps on the road
Financial markets have had one of those weeks of frenetic activity when each asset class blames the other for driving direction, few agree on an overall driver and it’s hard to square relative moves. What seems to be true is that idiosyncratic and locally-focussed factors are back in vogue – witness the lunge in sterling as the BoE nods at more QE and higher inflation, or the sudden dive in commodities even as global stock markets nudged 5-year highs. Micro or national issues are getting more play as the stress busting of recent months seems to have reduced cross-market correlations that characterised every ebb and flow of the overarching ‘global crisis’ for years.
To be sure, the longer-range theme of global reflation, the return from “safe haven” bunkers, and a gradual rotation out of low-yielding bonds remains the big backdrop and has helped explain the buoyancy of stock markets to date, the relative weakness of sterling and the yen as persistent money printers into the recovery, and the rise in core US/German/UK government borrowing rates alongside a sturdy bid for Italian and Spanish bonds.
But the week has thrown several curve balls into the mix. Fed minutes showed its policymakers musing yet again over when to wind down QE while euro area business surveys disappointed recovery hopes yet again in February. Commodities have retreated sharply on the perceived demand shock, with the dollar sharply higher on hopes the greenback presses will be turned off well before sterling or yen equivalents at least. But it gets more difficult to square some of the rest – gold’s nosedive this week could be argued as a haven exit perhaps, but its inflation-hedge role seems at odds with Britain and Japan actively pumping up prices. A more hawish Fed and dollar rise might be a better guide. And the drop in oil, metals and world equities (latterly) seems to riff off that too, for all the coalface talk of fund liquidations, supply boosts and chart hoodoos etc. Yet if the Fed slows QE – which would slow its bond buying — then bonds should surely be falling too? Not so – 10-year Treasury yields have slipped back below 2 percent all of a sudden. So is the bond market getting a dollar boost or is it worried about demand slowdown from the risk of a March 1 sequestration? If it’s the latter and that’s justified, then you can expect Fed chairman Ben Bernanke to sound a very different tone at his congressional testimonies next week. But what then of the supposed demand shock from the FOMC minutes? hmmm. It all starts to get a bit circular.
Maybe Europe has more answers. The latest business survey funk won’t be helped by messy Italian elections at the weekend and the delayed Cyprus bailout. The by-now merciful retreat of the euro, especially as the nervy market interest rate rise on LTRO paybacks looks set to dissipate - may be itself be a driver by pushing the dollar higher and disturbing global positioning.
Otherwise, the end of the shortest month next Thursday may simply be creating its own wobbles. Next week will see flash Chinese PMI for Feb and likely upward revisions to both US and UK Q4 GDP, correcting the suggestion from early estimates that the entire G7 contracted in Q4 last year. Flash euro zone and German CPI will keep the inflation watchers on the boil, while a useful contrast with euro-wide, German and Japanese jobless figures.
And so as March comes into view, the effervescent January for global markets has turned a bit flat in February. Year-to-date global equity gains remain about 4.5 percent – still significantly loaded in developed markets as emerging market indices have underperformed yet again. Yet if 2013 is to be another bullish year, the February pause may be a useful speed limit. If the two-month average rise were to continue all year, then gains for the year would be less than the 30%+ record years of 2009 and 2003. Back on planet earth.
Global events and econmic releases to watch:
Italy parliamentary elections Sun
Cyprus Presidential election run-off Sun
China HSBC Feb flash PMI Mon
Reuters Summit on euro zone future, Brussels Mon-Weds
APEC finance/cenbank meeting Jakarta, Tues/Weds
Bernanke’s semi-annual testimony Tues/Weds
US Feb consumer confidence, Jan new home sales, Tues
EZ Feb biz/consumer confidence Weds
French Feb consumer confidence Weds
Swiss Feb KOF confidence index Weds
EZ Jan money supply/credit Weds
UK Q4 GDP revision Weds
SAfrica budget presented to parliament, Weds
US Jan durable goods Weds
French Jan consumer spending/PPI Thurs
German Feb jobless/inflation Thurs
US Q4 GDP revision/Feb Chicago PMI Thurs
Japan Jan spending/CPI/jobless/capex Fri
Global Feb manufacturing PMI Fri
EZ flash Feb inflation/Jan jobless Fri
UK BOE Jan mortgage/credit Fri
US Jan consumer spending/saving, Feb UMich sentiment Fri