Finally the Fed reduces stimulus, but this failed to spark much reaction

After months of speculation regarding the likely timing of tapering, it finally came, with the Fed withdrawing $10bn in stimulus which is set to begin next month. Although not many economists predicted such a move, the announcement failed to trigger any significant movement, and both equities and emerging markets weathered the storm quite well.

The Fed has successfully convinced the market that tapering should not be confused with a tightening of policy. An adjustment to forward guidance reinforced this point, with the bank stating that loose monetary policy will remain, even after unemployment has reached 6.5%. A mere $10bn reduction in stimulus is hardly substantial and this may be part of the reason why equity and emerging markets appear unmoved by the news.

The day that the markets had been dreading seemed almost like a non event. Some might argue that this is a positive thing. We witnessed the effects taper talk had on the emerging market currencies with the Indian Rupee being one of the worst victims of a selloff. This suggests that all the speculation and the delay between September and December prepared the markets well for what was coming, unlike last summer when the markets were caught off guard.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Round-up

Bernanke holds fire on QE3...for now


Last Friday saw Ben Bernanke give his Jackson Hole speech, at which the Fed Chairman ushered in QE2 last year. Many had high hopes for indications of a third programme of monetary easing this time around, but were disappointed. It is clear though that the market has not given up on the Fed pulling the trigger at some point. Nor should it, if US data continues on its current path, then there can be no doubt that the Fed’s hand will be forced on the issue. US consumer confidence data this afternoon was incredibly poor, hitting its lowest point in over two years, at which point the US economy was deep in recession. The signs are all there and we remain bearish on the dollar in the longer-term, though safe-haven flows have been plentiful today.

Tonight’s Fed’s meeting minutes are unlikely to reveal much we don’t already know, further easing is not quite necessary at present but the Fed will act accordingly if US data continues to disappoint. Many will be turning their heads towards next month’s Fed meeting.

Friday also saw the release of the all-important quarterly US growth figure, which undershot consensus forecasts to show 1.0% growth (annualised). This week’s major release is the monthly update from the US labour market, a poor figure here will certainly increase QE3 bets.

Sterling on the back foot amid improved risk appetite

Sterling has performed well in recent weeks, benefiting from increased safe-haven appeal but risk appetite has improved in recent sessions. Global stocks are recovering and safe-haven flows are being redirected from the pound.

This week brings the monthly growth updates from the UK manufacturing, construction and services sectors. The services sector spearheaded growth last month and the same will need to be true this time if concerns of further UK quantitative easing are to be kept at bay.

Euro trading strongly despite usual issues

We have seen fairly weak demand for Italian debt at an auction today, suggesting that it could be the subject of the next episode in the eurozone debt saga. The issue of demands from Finland for collateral in return for Greek aid has re-entered the headlines today, which has put the single currency under pressure today.
Nonetheless, the euro is back at a seven week high against an out-of-favour pound, and is towards the higher-end of its range against the dollar. As ever, Asian investment is keeping the euro fairly well-bid.

On the downside for the euro though, the ECB interest rate outlook has come into question. With data last week revealing a further slowdown in the eurozone (though not as bad as many expected), speculation is growing that we may see interest rate cuts in coming months. Our bet is that this speculation underestimates just how hawkish the ECB is and will continue to be.

Sterling is trading under €1.13 and under $1.63 this afternoon. This GBP/USD level looks a little too weak and we could see it bounce back in coming sessions. Against the euro, sterling looks a little more vulnerable but losses below €1.12 look a stretch.
 
End of week forecast
GBP / EUR 1.13
GBP / USD 1.64
EUR / USD 1.45
GBP / AUD 1.5150

Richard Driver
Currency Analyst – Caxton FX
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Global stocks suffer as global recession fears mount

Away from the turmoil that we are seeing on the streets of the UK, matters in the financial markets are equally chaotic. The FTSE 100 dipped below the 5000 benchmark for the first time in over a year and indices across the world are showing similarly sharp declines.

What has caused it? Well, concerns over global growth have been growing over recent weeks and months. There has been a noticeable slowdown in growth data throughout the global economies. Most alarmingly though, the US economy has entered an alarming ‘soft patch.’

Eurozone debt issues have also built to a crescendo in recent weeks. Greece narrowly avoided a messy default (though it was clearly a selective default) and was dealt its second bailout in 18months and Portugal has had to be bailed out. Even more concerning is the fact that bond yields in Spain and Italy (two major eurozone economies) have hit record highs in the past week. Unless borrowing costs in these two nations calm down, the willingness of Germany to provide further funding will be stretched to breaking point. Surely Germany cannot be expected to bankroll the eurozone’s heavily indebted states indefinitely.

Arguably the straw that broke the camel’s back was rating agency Standard & Poor’s avoidance of the United States’ AAA credit rating. Their eleventh hour avoidance of a US default failed to prevent the move, and global markets have reacted by flooding out of risk assets and into safe-havens such as gold and the swiss franc.

The steep decline we have seen in recent sessions has stabilised today, perhaps indicative of a feeling that stocks have been oversold. However, with the US Federal Reserve meeting tonight and tomorrow’s UK quarterly inflation report likely to downgrade respective US and UK growth forecasts, the good news story to boost confidence looks unlikely to be forthcoming.

The safe-haven dollar is trading pretty strongly at present but long-term prospects look fairly grim from where we are sitting. Low growth, high unemployment, a debt downgrade, ultra-loose monetary policy and the possibility of a third programme of quantitative easing, low inflation; all these factors point to a weaker dollar. Yes the UK and the eurozone have their own problems, very serious problems, but the dollar looks particularly weak in the long-term.

Meanwhile, events in London may well be taking their toll on the sterling. Things are getting out of hand and it wouldn’t be surprising for the markets to finally take note.

Richard Driver
Senior Analyst – Caxton FX


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