Reality Bites as Q1 end Looms

A combination of events last week ended up having a rather negative impact on global

markets by the close on Friday. It wasn’t just the dovish shift by the Fed earlier in the week,

but perhaps, and more pertinently, a salutatory reminder that the European outlook is more

concerning. The latest manufacturing PMI data from both Germany and France last week

was alarmingly weak and certainly very much in contractionary territory as far as Germany

was concerned.

That news on Friday completely stymied the EUR rally yet again and the failure to get past

1.1450 versus the dollar is in part what drove the price back under 1.13 and lifted the USD

index back above 96.00 and then later, back through 96.50.

A continued lack of any tangible progress on the US/China trade front is beginning to weigh

on markets too I think and within that context the latest March Chinese Manufacturing PMI

data is due out on Sunday/Monday next week could be very important. Meanwhile, the US

treasury market has continued to attract flows and that has pushed the yield on the 10year

note lower again, trading around 2.43% as this week gets underway.

Perhaps more of a concern for many market operators is the fact that the US yield curve has

started to invert and that for many is an alarm bell indicating that a recession is just around

the corner. Indeed, to that end I should note that the 2’s/5’s yield has in fact already

inverted, to the tune of about 8 basis points. Further to that, the yield of 3month US bills

has also risen above that of the 10year note- for the first time since 2007.

Despite all the headlines and media coverage nothing materially changed on the Brexit front

last week, over and above what I reported on previously; that the EU would grant the UK an

A50 extension, but with provisos attached of course. No one can be sure just how the EU

might react again if there’s still no parliamentary consensus by the end of this week.

Whilst ‘no deal’ is still a live prospect of course the markets do not surely believe that will be

the outcome because if they did, then the GBPUSD would not currently be where it is, close

to around 1.32 as of this morning. However, from a personal perspective I am taking

nothing for granted on this and my default position is still sadly unchanged, as indeed it has

been since June 2016-remain or leave with no deal.

This week is very light in terms of key economic releases (see main highlights below) which

for many operators is probably just as well with the end of Q1 fast approaching. Leaving

aside any immediate fundamental risk concerns, the proximity of that quarter end is

probably a good enough reason alone to take risk off the table in the coming days. Perhaps

with the compendium of recent news, it’s also a case of ‘reality biting’ too, given the

voracity of the rally in equity markets so far this year?

In this regard its probably worth noting that the month end also defines the Japanese

financial year end too. Possibly a point not wasted on the JPY, especially if the current risk

dynamics continue to play out as the week unfolds and that does lead to a degree of forced

JPY repatriation.

The main scheduled event of the week is the latest monetary policy decision from the

Reserve Bank of New Zealand in the early hours of 27 th . Whilst the RBNZ is expected to keep its benchmark rate unchanged at 1.75%, I wouldn’t necessarily rule out a cut here despite the consensus. Even if that doesn’t transpire, I would be surprised if the message from the RBNZ this week was anything upbeat.

As I sign off here the latest German IFO index has just hit the screens and is better than the

markets were expecting and that’s helped to lift the mood and the EURUSD slightly too. A

lot of water yet to flow under the bridge this week though.

Important Economic Releases Due this Week

26/03- 2.00pm US March Consumer Confidence Index

27/03- 1.00am RBNZ Monetary Policy Decision

(Benchmark rate expected unchanged at 1.75%)

27/03- 11.00am UK CBI March Reported Distributive Sales

28/03- 12.30pm Final Reading of US Q4 2018 GDP

29/03- 8.55am German March Unemployment report

29/03- 12.30pm Canadian January Annualized GDP Report