It is one thing to monitor data, understand economic fundamentals, market forces and how they are affected by inflation and interest rates; it is quite another, to get your head round the growing web of global politics and attempt to discern who is manipulating what and who.
The nations of the world economies are on a journey now of central bank interventions with a competitive angle.
That, in turn, has begun a process of ‘predictability degeneration’ which can only import an increasing amount of choppiness into the markets.
Last week saw an attempt by Marc Carney to bring optimism to the UK growth outlook. He has some data to back it but there is also an election looming so a temptation to spin the current conditions.
In his defense he isn’t veering from the accepted view of the Fed in the US, that oil prices will bring a dip in inflation which will not derail a recovery. Of course this only applies to stronger economies and their are only two in the running.
Yes, it is a paradox and the old double edged sword view of oil prices, at once a negative on inflation targets and a stimulant to growth and recovery. It is true that in those stronger economies it will eventually lead to inflationary forces.
At least that is the theory. The reality is less clear.
Greece, Russia and the EZ
These three represent just one small part of the global political puzzle but puzzling enough to not know where to start.
Two effects have pushed the Euro up in value this past week. One was the speculation that an agreement of some sorts is likely between Greece and the ECB. Mr Tsipras has already conceded some ground but not enough to upset the new governments home support and thus held so far to his domestic mandate.
The German camp looks unlikely to cede any ground on the Greek proposals which include 1.6 billion in interest profits from the ECB’s Greek bond holdings. No comment!
The short term outcome is likely to be a prolongation of the bail out repayments and a neat avoidance for now, of the nitty gritty details upon which there seems no hope yet of compromise. A potential area of negotiation may be a loosening of some of the austerity measures. For sure though, there is a long way to go and some potential surprises and disappointments on the way. Not to mention, the fragile goal of a conclusion.
Monday’s meeting broke down and put more downside on the Euro. There is still hope of some agreement before Friday but a growing risk of Grexit. It does seem that the Greek government will hold their nerve, as their finance minister Varoufakis claimed, there is no plan B. If anyone budges it might have to be the troika.
The second positive for the Euro was the cease fire ‘in effect’ in the Ukraine. This is even more fragile. The history of failed cease fires will not promote confidence but it is a start and brought some optimism to the Eurozone. There was also a good GDP report from the Germans which brought a rally in the Dax and left the EZ on an up note at the end of the week.
Data to watch in Europe includes German economic sentiment later today. Another meeting tomorrow in Europe will be held to discuss the emergency loans to Greece (ELA’S)
Marc Carney: Politics or economics?
It is a bit of a ‘u’ turn to use political parlance. Doveishness which previously devalued the GBP turned last week to hawkishness. Despite Carney’s warnings of negative inflation in the spring the outlook is good, and inflation targets may not just be met but exceeded come the end of 2016. Theremay be those who doubt the Cameron/Carney alliance theory as the British electorate
are still seemingly more worried about inflation becoming a problem than deflation being a potential risk. Either way it is yet another example of manipulating markets of which we have become all too familiar.
The GBP strengthened on the news and since the election is still nearly 3 months away there is reason to expect that trend to continue for at least the short term. The GBPUSD is in an interesting place for at least a pullback. It could be sign of a fundamental shift but it is early days for that. Gauging the US strength is obviously a factor in this and that may not be so easy.
There have been some better than expected results in the UK especially in the jobs market and even signs in wage growth. Trade balance missed its mark, but PMI is gaining traction in manufacturing and services, the latter important to the British economy. All in all it looks like the GBP may have some upside potential even if limited. It may be short lived, so a close watch is called for as we monitor the situation in the US and expect some election jitters.
The USD
Of course, the US disappointments of the last week, including missed expectations on employment, retail sales and consumer confidence added to perceived Euro and GBP strength. The upside potentials is still there but the bond market has shown through the US yields that it is not so confident in rate hikes as the Fed are and that much of the upside has already been factored in. The US 10 yr note yield rallied this week on the back of the strong data the week before on January job stats. This is a strong move up in the yield, but the bond market prediction is still behind the FOMC target of 2% by the end of 2016.
The USD index is clearly ‘on a break ‘and with so much transparency and factoring in the trend, if it resumes, it may not be as strong as the one we are used to seeing. It is our front runner for recovery, that much has not changed, but it may have lost enough steam to cause concern.
Oil, Commodities and the commodity Currencies.
The rally in oil in the last three weeks has been a relief to some. Strangely it is difficult to see how it can be sustained as the producers slowed down by prices will have a opportunity to come back on stream, especially in the US. It should be noted that inventories are still rising. There may be yet some downside potential but it is probably easier to be aware of the upside limit for now as oil tries to find it’s level.
For the commodity currencies, damage has been done and the fall out will continue. RBA minutes were not as doveish as thought which caused a rally in the AUDUSD, but it remains in a range.
It remains an opportunity for shorts, so watch data for opportunities and to be ultra safe, for the range to break to the downside. . Here is the Aussie against the USD on a four hour chart;
Politics permeates every market and every trading decision and the web is getting ever more tangled. Considering Putin’s intrigues alone, and the extent of them is completely un-guessable, they affect every major global economy as he tries to buddy -up with extremists across Europe. The ECB and Greek wrangling is unpredictable and unsettling to say the least. Exchange rate manipulation forges on.
In the here and now of trading it is what it is. Apologies for the repetition. Now, more than ever, our present realty is muddied by changing sentiment, rampant speculation and introspective interpretations.
Keeping focus on fundamentals and whether the underlying factors have essentially changed or are in the process of shifting, can at least keep us from the pitfalls of choppy markets. Trading decisions requires awareness of both current politics and underlying fundamentals but we should not let the distractions of the former defocus us from the latter.
Judith Waker
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