Global stocks rounded off a strong first quarter on a cautious note on Friday as market participants got to grips with some important economic data and digested another batch of comments from officials at the US Federal Reserve. The FTSE All World index was down 0.4 per cent in late afternoon New York trade but was 6.4 per cent higher than where it ended 2016, putting it on track for its best start to a year since 2012. Wall Street’s main indices reached a succession of record highs during that period, while European stocks hit 15-month peaks, amid an almost unwavering belief in the “Trump trade”. But confidence has been shaken somewhat by the US president’s failure to gain enough support for his healthcare reforms, which triggered concerns about his ability to push through tax cuts.
Emerging market stocks put in an even stronger showing with the benchmark MSCI EM index up more than 11 per cent for the year to date, despite slipping on Friday. South African financial assets came under severe pressure after President Jacob Zuma dismissed finance minister Pravin Gordhan, prompting fears of imminent downgrades to the country’s credit rating. The rand was down 0.9 per cent at 13.407 per dollar, taking its fall over the week to 7.9 per cent as investors expressed concerns that Mr Gordhan’s replacement, home affairs minister Malusi Gigaba, had no finance or business sector experience.
Equity market action was relatively muted on Friday, with the S&P 500 down 0.2 per cent at 2,362, reflecting quarter-end profit-taking after its 5.5 per cent rise over the past three months. It was down about 1.4 per cent from the record close reached at the start of March. In Europe the pan-regional Stoxx 600 edged up 0.2 per cent to its highest close since December 2015, giving a three-month gain of 5.5 per cent.
The dollar index was up less than 0.1 per cent as the euro fell slightly to $1.0669, after a choppy session in the wake of news of a notable drop in inflation in the region last month. The “flash” harmonised index of consumer prices was up 1.5 per cent in the year to February, down from 2 per cent in January. By comparison the annual US core personal consumption expenditure inflation rate, the Fed’s preferred measure held at 1.8 per cent in February, just short of the central bank’s 2 per cent target. Headline PCE inflation came in at 2.1 per cent.
The single currency traded as high as $1.0904 at the start of the week, before a media report highlighted the European Central Bank’s belief — citing “ECB sources” — that the market was taking too hawkish a view of its policy intentions. Comments from US policymakers provided a marked contrast. A number of Fed officials this week came out in favour of “several” more interest rate rises this year. At its March policy meeting, the US central bank’s median projection was for two further increases in 2017. “It seems most Fed officials are coalescing around the idea that a total of four rate hikes in 2017 is not out of the question on the back of growing confidence in the US backdrop,” said Tom Porcelli, chief US economist at RBC Capital Markets.
Market participants will be looking look to Fridays non-farm payrolls number to add weight to that argument. The Federal Reserve said the US labour market has continued to strengthen as it opted to raise interest rates at its monetary policy meeting in March. But the latest snapshot is expected to show that job growth in the world’s largest developed economy cooled in March, with initial estimates suggesting the economy created 175,000 jobs. That compares with 235,000 in February when job gains in construction, education, manufacturing, healthcare and mining industries helped push the US unemployment rate down to 4.7 per cent from 4.8 per cent. The non-farm payroll report is also expected to show that the unemployment rate held steady, while average hourly earnings inched up 0.3 per cent in March from the previous month.
Since its March meeting, expectations that the ECB will be able to lift rates before the end of the year have grown, and attention will focus on any signs of a more hawkish mood on the governing council and a scaling back of its bond-buying programme. ECB president Mario Draghi’s room for manoeuvre is likely to be constrained by the proximity of the French election, the first-round voting takes place four days before the April 27 ECB meeting. Adding to that sense is a retreat from the high levels of inflation that has helped fan market expectations of a tapering.
“To move from tapering to a first rate hike requires higher inflation rates, a pick-up in wages and a further strengthening of the economic recovery,” argues Carsten Brzeski, chief economist at ING. “The possible exit sequencing — whether there will be a rate hike before or only after the end of QE, is likely to remain a subject of market speculation for a while.”
In early Monday trade, the dollar index was up 0.1 per cent at 100.24, while the euro added 0.2 per cent to $1.0677. The British pound shed 0.1 per cent to $1.2535. The Australian dollar took a tumble after data showed retail sales contracted 0.1 per cent month-on-month in February, from 0.4 per cent growth the previous month and below economists’ expectations. The Aussie dollar was down 0.2 per cent at $0.7614, making it the worst-performing major currency on Monday. Following a volatile week in which South Africa’s finance minister was dismissed by President Jacob Zuma, the rand was down 0.1 per cent at 13.42 against the greenback.
EUR/USD gained overnight, flirting with highs near $1.0680 ahead of global manufacturing PMI reports. The bulls have taken a breather over the last couple of hours, stalling the Asian recovery and trading just ahead of the mid-point of $1.0600 handle in early European flows. From a technical view, the overnight low at $1.0655 forms our first support level ahead of the March 15th/14 lows at $1.0601/1.0597. On the upside, the March 16th low at $1.0704 and March 21st low at $1.0717 are in focus ahead of yesterday’s high at $1.0770.
GBP/USD has traded within tight ranges ahead of the manufacturing PMI for March, is expected to show that the pace of expansion in the activity to have improved slightly last month. The pair is currently probing lower around $1.2525, having slipped from the mid-$1.2500 region. In terms of technicals, today’s high at $1.2555 may offer some resistance ahead of Tuesday’s high at $1.2596. On the downside, yesterday’s low at $1.2401 and Wednesday’s low at $1.2375 may offer support.
USD/JPY managed to recover early lost ground to around the ¥111.50 area following the release of a weaker than expected Japanese Tankan large Manufacturing index which came in at 12 compared to a forecast of 14. Ahead, the Buck will likely be kept busy today with ISM manufacturing and construction along with speeches from Dudley and Harker. From a technical view, the overnight high at ¥111.58 may offer some resistance ahead of Friday’s high at ¥112.19. On the downside, Thursday’s low at ¥110.91 and Wednesday’s low at ¥110.69 are in focus.
GBP/EUR is lower this morning, with the better tone from the single currency pushing the cross to lows at €1.1733 at the start of the week, while the demand for the Pound appears somewhat subdued. Looking ahead, UK’s Manufacturing PMI for the month of March is due along with final PMIs from the Eurozone. From a technical view, the February 23rd low of €1.1771 may offer some resistance ahead of the February 27th high at €1.1807. On the downside, Thursday’s high at €1.1684 and Friday’s low at €1.1630 are in focus.