Market sentiment has worsened, with equities down across the board, including 2-2½% falls across Europe and Japan, and the S&P500 currently down 0.7%. JPY and CHF head the currency leaderboard, while the AUD is the weakest of the majors.
It’s not that obvious why market sentiment has turned so much and it may just reflect an unwinding from the buoyant conditions during March.
Overnight, economic data were mixed, and overall on the softer side of expectations, but not significant enough to satisfactorily explain the move in sentiment.
US ISM non-manufacturing rose for the first time in five months to 54.5, slightly ahead of market expectations. A slightly wider than expected trade deficit led some to revise down Q1 GDP estimates.
The Atlanta Fed GDPNow forecast sits at just an annualised 0.4%. In Europe, Markit revised down its services PMI to 53.1 (prev. 54.0), consistent with a euro-area economy growing at 0.3% q/q in Q1, a similar pace to the previous quarter. This data followed weaker than expected German factory orders.
USD/JPY is down 0.8% to 110.50 having dipped below 110 this morning, putting the Yen at its strongest level in 18 months. The market is now on “intervention watch”, fuelled by comments by Japan’s Chief Cabinet Secretary Suga that the government is keeping its eye on foreign exchange movements.
While it’s easy to point to Yen strength overnight as being caused by weaker global risk appetite, that doesn’t explain the Yen’s 7% gain through March over a period when risk appetite was improving.
To be sure, a more dovish Fed explains a lot of the move, but other less obvious forces are also at play. There is widespread anticipation of further BoJ easing at the end of the month, but unless something radical is done like helicopter money, it’s hard to see a further nudge down in interest rates or more asset purchases doing much to reverse the trend.
The AUD is the weakest casualty of the risk-off move. Yesterday we mentioned the broadly-based fall in commodity prices.
Over the last 24 hours we’ve seen further falls, albeit more modest, with the Bloomberg commodity price index down “only” 0.3%. A larger-than-expected trade deficit added to the weaker sentiment. AUD is down 0.9% to 0.7540. There was a brief 30pip rally yesterday afternoon after the RBA left rates on hold and Governor Stevens offered only mild concern about the recent strength of the currency, but the move wasn’t sustained for long.
The NZD is down 0.5% to 0.6800, after reaching a low of 0.6760 this morning. The NZD softened after the QSBO showed weaker business confidence and activity indicators, while the pricing indicators remained soft. The NZD was dragged lower on global sentiment and then rallied after this morning’s slightly better-than-expected GDT dairy auction. The average winning price rose by 2.1%, with whole milk powder up 1.5%.
Yesterday we mentioned the odd increase in GBP after a weekend poll showing a vote for Brexit in the lead. That gain has been reversed, plus some, with GBP down 0.8% to 1.4155 and EUR/GBP up to 17-month highs around 0.8050.
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