By eToro – The slow grinding increase in the equity markets continued this week as did the strength of the US dollar. Over the past few weeks the strong correlation that seem to grip the currency and equity markets has now dissipated as the dollar has now become the currency of choice give the fiscal issues that have plagued the European Monetary Union. For the week, the S&P 500 Index closed up higher by 1% at 1166. For the past 4 weeks the Dow Jones Industrials, the S&P500 Index and the NASDAQ have all closed higher.
EU – The Bailout of Greece and Euro Weakness
The divergence of opinions with regards to Greece, has created strife in the marketplace as the ECB President Jean-Claude Trichet has made public comment as late as Thursday, that the IMF has no place in deciding how any European country should handle its fiscal issues. This news came right before the EU agreed to a plan that would set up a safety net for Greece. Trichet’s comments are directly opposite to the current opinion of Germany and France who have made the IMF involvement a condition of their participation in so called bailout of Greece. Trichet also flip flopped on the issue of collateral. The extension of the relaxed collateral rules is an important issue, even if lower quality paper gets a bigger haircut. The size of the haircuts will be the main market focus of the next ECB meeting on April 8th. These relaxed collateral rules, some argue, is tantamount to some easing of monetary policy. The uncertainty comes on the back of a downgrade by Fitch which lowered Portugal’s sovereign credit rating one notch to AA- and warned of further cuts unless the government changes its fiscal course. The cumulative effect on the currency has been dramatic. Volatility in the Euro market has been relatively high with multiple day ranges. During the course of the week, the Euro currency vs. the US dollar broke through support levels at 1.3400, and touched a low of 1.3267, before retracing some of the losses for the week (which opened near 1.36). After the news that the EU would create a backstop for Greece, the Euro began to rally. Technically, the breakthrough along with the uncertainty created by multiple debt issues within the EU has formed a resistance level for the Euro, which could lead to additional selling near 1.3450.
Deflation in Japan
Meanwhile, the deflationary grip on Japan continues. Headline CPI in February was 1.1% below year ago levels, the same pace as recorded in January. The Core CPI (ex food and energy) figure was slightly higher than expected but still negative for a year in a row. This follows Thursday’s report of a slightly larger than expected decline in corporate service prices. The corporate service price index fell 1.3% year over year in February and the January series was revised down to -1.2% from -1.0%. The Bank of Japan expects deflation to persist through the next fiscal year. Of the 525 items tracked by the CPI basket, 335 fell in February compared with January when prices for 342 items fell. The Japanese finance ministry has been persistent in pushing the BOJ to enhance its quantitative easing measures in an effort to stem further deflation. Eventually, this will spill over into growth and create further downward pressure on the Japanese economy.
UK – Inflation Easing
In the UK, inflation data is beginning to ease after a couple of months of upward pressure. The pace of inflation for February released this week was slightly lower than expected and BOE Governor King did not have to write an explanatory letter to the government as he was obliged to do in December and January. The headline CPI rose 0.4%, slightly less than the market expected. The year-over-year rate slipped for the first time since last September (3.0% vs. 3.5% in January). Core inflation, which in the UK excludes energy, food, alcohol and tobacco, slowed to 2.9% from 3.1%. Core measures of inflation have been generally tame in developed countries with the UK being the exception recently. The ease in inflation will only help the BOE and allow for further quantitative easing if the economy stumbles. Additionally, the easing of inflation expectations shifted bids pressure on the pound. Technically, the pound faces a moving average crossover which is relatively bearish for the currency.
US – Bernanke speech, Housing prices, GDP
In a speech at a House hearing, Federal Reserve Chairman Ben Bernanke acknowledged that the Federal Reserve is closer to selling some of its $1.25 trillion portfolio of mortgage securities. Chairman Bernanke has resisted this idea in the past because millions of U.S. homeowners and many investors would be affected by Federal Reserve sales which would push down prices and increase Mortgage rates. This is Bernanke’s way of preparing the market for a normalization process. “I anticipate that at some point we will, in fact, have a gradual sales process,” Chairman Bernanke said at a House hearing. The Fed has been purchasing mortgage-backed securities in an effort to stimulate the housing market with lower mortgage rates.
In US housing economic news, Sales of existing homes fell a third time in a row during February, but the decline was less than expected, spurring hope for a turnaround in the spring. Home re-sales tumbled by 0.6%, to a 5.02 million annual rate from an unadjusted 5.05 million in January, according to the National Association of Realtors. Economists surveyed expected sales last month to decrease 2.0%, to a rate of 4.95 million. The median price for an existing home was $165,100 in February, down 1.8% from February 2009. The housing market has continued to show conflicting signals but the majority of the economic news has shown a market that is slow to recover.
Growth in the U.S. economy at the end of 2009 was slightly less than earlier estimates, according to the Commerce Department, mainly due to downward revision to consumer and business spending. Gross domestic product rose at a 5.6% annual rate October through December, the Commerce Department reported Friday in its third GDP estimate for the final quarter of 2009. Corporate profits climbed 8.2% in the fourth quarter, lower than the 13.8% surge in the third quarter. Year-over-year, earnings were up 51.8%.
Next week that market will be focusing on a plethora of economic data. On Monday the EMU will release consumer confidence, expectations are for an index level of -17 compare to last month’s -17. Later on Monday the US will release Personal Income and Consumption. On Tuesday, market participants will focus on the UK GDP, US Consumer Confidence and Japanese PMI Manufacturing. On Wednesday, Australian Retail Sales and EMU Employment take the headlines, along with the ADP Employment number. Thursday is purchasing manager’s day, with the UK, EMU and US ISM all being released. The big number for the week is Friday’s US Employment number. Analysts expect a positive reading of 187 thousand jobs, which would be the first increase in more than a year.
Daily Forex Market Analysis provided by eToro
Disclaimer: Trading in the Foreign Exchange market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the foreign exchange market. Don’t trade with money you can’t afford to lose.
