Market Wrap – Bears on the retreat

The bears got mauled this week as the risk reversal reversed under the weight of weak US data and its impact on the USD. I’ve Just published my Australian Dollar Weekly Wrap over at MacroBusiness which looks at the reasons why we saw a reversal and suggests a little more USD weakness and AUD strength might be in the offing.

On equity markets we didn’t see an abundance of ebullience but they did come back from the brink and the bond market rally continues. In Australia the markets continue to retreat from RBA rate hike expectations which poses a problem for the punditry which is at odds given many have called a June hike after what we think was the mis-read SoMP earlier in the month. This week’s data, GDP and partials, will be critical to scotching these thoughts, for good we hope.

Overnight it also seems that the G8 made all the right noises which worked against the USD insofar as it stopped other currencies problems being a negative. It is still incongruous to me how the EUR can have the value it does, or the GBP for that matter, against the USD. but as I wrote yesterday in many ways all three are in decline relative to the emerging world and the AUD gets to bather in the reflected glory.

But you have to wonder if anyone actually read the release because on my take it was fairly bland and didn’t tell us anything new or, more importantly, with all the global sovereign issues, anything concrete. On the global economy they said

The global recovery is gaining strength and is becoming more self-sustained. However, downside risks remain, and internal and external imbalances are still a concern. The sharp increase in commodity prices and their excessive volatility pose a significant headwind to the recovery. In this context, we agreed to remain focused on the action required to enhance the sustainability of public finances, to strengthen the recovery and foster employment, to reduce risks and ensure strong, sustainable and balanced growth, including through structural reforms.

Here is the link to the G8 if you want to have a look but for mine there is nothing new in it.

  • We are still faced with big public finance problems, especially in the periphery of Europe – a focus doesn’t fix things it just confirms that markets will remain focussed on it as well,
  • Focus is a code word for more austerity, so economic growth by definition faces another headwind here,  
  • If G8 adopts the UK approach then the focus will go to letting inflation run faster than otherwise would be the case to increase nominal GDP for the stock of debt and thus reduce the ratios
  • The reactions of markets in selling the USD, with the above point, reinforces the problem with commodity prices and inflation,

So the headwinds to growth and a recovery are intensified not reduced by this communique, or at least the market’s reaction to it I’d suggest.

Another thing I’d suggest is to have a look at Jeremy Grantham’s newsletter from this month that we linked in weekend reads.

So all in all the bears on the USD, Equities and commodities are on the retreat – for now. We think the only certainty at present is volatility. But as we hypothesised yesterday that could actually be a good thing.

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