Risk assets soar, buoyed by an excellent job market report out of the US
11/Μαρ/2013 • Currency Updates•
Equities worldwide soared, in some cases to all time highs, buoyed by a spate of positive economic news out of the US, which culminated in a nice positive surprise from the February non’-farm payrolls report. Conversely, ultra safe Government bonds and traditional safe havens fell hard. Commodities did not join equities in the rally and the decoupling between these two asset classes is developing into one of the year´s trends. The Euro noticeably failed to rally in an environment which would normally have been extremely supportive, in yet another sign that investors are focusing more and more on the Eurzone’s dismal macroeconomic prospects.
The Bank of England’s MPC left both rates and the Gilt purchase target unchanged. We have to admit to some puzzlement over this passivity, given the stagnation in the UK economy and the actual contraction taking place in its closest external parter, the Eurozone. As usual when no change is made to policy, no communique was released, and so we will have to wait for the release of the meeting minutes before we see how far the members are from expanding QE.
There were few macroeconomic news releases worth pointing to outside the Central Bank meeting. The most relevant was perhaps the volume of net lending, which gave yet another gloomy sign showing contraction. This absence of market moving news caused Sterling to move almost in lockstep with the Euro, and we await the minutes of the meeting to get a clearer picture of the medium term trend in the currency.
Another week, another raft of dismal macroeconomic news and downward revisions out of the Eurozone. As expected, the ECB staff cut significantly its projections for economic growth, and now expect a 0.5% contraction in GDP growth. This is another sign that Eurocrats continue to make slow progress towards realigning themselves with reality. Our optimism is tempered by the lack of official reaction to the dismal projections, since Draghi refused to take any additional easing measures. Our pessimistic view of the common currency was supported by the price action last week. In spite of soaring equities and most other risk assets, the Euro made only modest headway during the week, only to lose all its gains and then more after the stellar job data published Friday in the United States. As long as investors remain focused on the macroeconomic fundamentals, we believe that the Euro is headed into the low 1.20’s.
All eyes were on the payroll report out last Friday, and observers were not disappointed. Headline employment increased by 236,000, the unemployment rate dropped by two tenths of a percent, and there were further good news out of the level of labor force participation and the number of the long-term unemployed. Risk assets and the dollar soared on the news. This provides further evidence that the tentative hawkish shift we read in the last Fed minutes has legs to run, as does the US dollar. Other news (durable goods orders, mostly) were also consistent with our view that business is finally starting to take advantage of the extremely favourable financial conditions to hire and invest. It looks increasingly likely that exit from non-conventional measures will take place first in the US among the major economies, and this should provide strong long-term support to the green back.