Capital Trust Markets – The US dollar surged into the weekend on a raft of better than expected data and a distinctly hawkish monetary policy outlook. Industrial production, manufacturing, employment and current account releases combined to paint a bright outlook for the US economy, and Fed Chair Janet Yellen suggested that a rate hike could succeed the closing of the asset-purchasing taper, which implies a near term target before the end of the year.
However, there are a number of underlying fundamentals that markets seem to be missing, or ignoring, that could negate this rose-tinted outlook.
Crimea
The first is the situation in Crimea. For a number of weeks around the March – February crossover, the potential for military escalation fueled a risk-off sentiment across global markets. Major indices dipped while safe havens gained strength as investors rushed to reallocate capital and reduce exposure. Now the escalation has arrived, those same investors seem not to be in such a rush to take their money out of the markets. This equates to a sort of hair-trigger situation. Investors are holding their exposure for now, but an adverse event in Eastern Europe could trigger a sell-off and a rush to Yen and gold safety. A number of potential triggers have presented themselves, US sanctions on Russian officials, Russian sanctions on US officials, the death of a Ukrainian military official and the seizing of multiple military bases in Crimea, but as-yet, none have proved catalytic. This, of course, may indicate that the market is correct in its ignorance, but the more risk aware trader will surely have one eye on the situation as it unfolds.
China
The second is the outlook in China. The wave of disappointing data continued on Sunday, with HSBC manufacturing PMI falling short of expectations, with the index coming in at 48.1. In addition, a number of high profile companies have defaulted on bond and loan repayments, and reports suggest these are just the tip of the iceberg. An amended version of the old-time favorite – “when China sneezes the whole world catches a cold” – looks like it could replace its predecessor in the not too distant future. China’s shift from manufacturing giant to a global investor has left many economies vulnerable to a contraction; one of which is the U.S, and a slowdown could wreak havoc in financial, commercial and housing markets in the nation.
To Close…
All said, for now at least, the US dollar look set to remain strong. Having said this, fundamental factors could put pressure on the currency and equity markets in the not too distant future. When the markets start to sell off, it will be those traders who keep this in the back of their mind that come out on top.
Written by Samuel Rae – Currency Strategist at Capital Trust Markets
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