Europe turns to ECB after U.S. inflation selloff

Warren Takunda

Traders' Opinions

Economic

Forex

Summary:

Stubborn US inflation data triggers global market selloff. Euro wobbles after strong dollar rally, ECB meeting eyed for rate cut clues. Yen hits new 34-year low against USD, intervention threat looms. Oil gains on Mideast tensions.

Stocks and the euro were steady ahead of an European Central Bank meeting on Thursday, after stubborn U.S. inflation numbers triggered the biggest global market selloff in months and left Japan's yen at a new 34-year low.

Euro traders were feeling especially fragile after Wednesday's surprise U.S. CPI figures sent the dollar on its biggest tear in over a year against the single currency by quashing hopes of near-term Fed rate cut.

Europe's bourses had opened broadly flat in line with MSCI's main global index , opens new tab, with focus on whether ECB chief Christine Lagarde bolsters expectations later that it will start cutting rates in June, thereby opening up a serious wedge with the Fed.

Bond markets were still reeling, meanwhile, after the 10-year U.S. Treasury yield - the main driver of global borrowing costs - had shot back above 4.5%, its biggest daily leap since September 2022. /US

Germany's 10-year bond yield - the European benchmark - was up fractionally at 2.45%, after rising 6 bps on Wednesday although that was a small change compared to the 18 bps jump experienced by Treasury traders.

"The key driver now remains U.S. rates," Amundi's Co-Head of Emerging Markets/Fixed Income Sergei Strigo said, pointing to Treasuries braking up through the 4.5% level again.

"The question is whether we are going to stick to these levels or are going to go higher".

For ECB watchers, the bank has kept rates steady since September but has already signalled that cuts are coming into view, with policymakers awaiting a few more comforting wage indicators before pulling the trigger.

The currency bloc is now in its sixth straight quarter of economic stagnation and the labour market is starting to soften, an obvious contrast to the U.S. economy which continues to grow robustly.

"While there are limits to how much ECB policy can diverge from the Fed over time, there is nothing to stop the ECB from cutting first or setting its own pace of cuts early on in the easing cycle," Deutsche Bank's Jim Reid said.

However he also pointed to how markets cut the likelihood of an ECB cut by June back to 82% on Wednesday, down from 91% the previous day. Likewise at the Bank of England, it fell from 74% to 56%, for the Bank of Canada it fell from 78% to 53%, and for the Reserve Bank of Australia it went from 25% to 21%. Europe turns to ECB after U.S. inflation selloff_1

Europe turns to ECB after U.S. inflation selloff_1

Reuters Graphics

INTERVENTION WARNING

U.S. stock futures , were little changed after Wall Street had fallen around 1%. Treasuries also steadied after the surge in yields had pushed them to their highest levels since November.

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan , opens new tab slipped 0.3%, paring some earlier losses, while Japan's Nikkei, opens new tab dropped 0.5%.

It was the beleaguered yen that was the main focus though, after the roaring greenback knocked the Japanese currency to a 34-year low of 153.24 per dollar.

It eased up slightly to 152.90 yen as the risk of government intervention potentially looms large now. Japan's top currency diplomat, Masato Kanda, warned on Thursday that authorities would not rule out any steps to respond to disorderly exchange-rate moves.

In commodities, metal prices were resilient in the face of a strong dollar while oil held gains after advancing more than 1% following an Israeli strike that killed three sons of a Hamas leader, fuelling worries that ceasefire talks might stall.

Brent rose 0.15% to $90.62 a barrel, and U.S. crude was 0.1% higher at $86.33 per barrel. Gold prices gained 0.3% to $2,338.79 per ounce, charging towards record highs, after losing 0.8% overnight.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Ukadike Micheal

Commodity

Economic

The South Korean won plummeted to a 17-month low on Thursday, reaching 1,364.85 per dollar, marking a significant decline amidst a backdrop of various economic and geopolitical factors. The strengthening US dollar, propelled by rising inflation, and concerns over China's slowing consumer prices contributed to the downward pressure on the won. Furthermore, the unexpected defeat of South Korean President Yoon Suk Yeol's party in parliamentary elections added to the currency's woes, amplifying market uncertainties.

HI Investment & Securities warned of the potential for further depreciation of the won, projecting a drop to as low as 1,400 per dollar if crude oil prices surge to $100 a barrel. This forecast underscores the susceptibility of South Korea's economy to fluctuations in commodity prices, particularly oil, given its heavy reliance on energy imports. The firm's economist, Park Sang-hyun, emphasized the significant threat posed by rising oil prices, highlighting the potential impact on the country's economic stability.

The ongoing oil rally, coupled with expectations of substantial dividend payouts by local firms to foreign investors, is expected to exert additional pressure on the won. Technical analysis suggests that the next support level for the won lies at 1,400 per dollar, indicating the potential for further weakness in the currency. As South Korea imports the majority of its energy needs, including oil and natural gas, from global markets, the surge in commodities prices poses significant risks to its economic outlook.

Recent developments in the oil market, with Brent futures trading above $90 and West Texas Intermediate nearing $86, reflect heightened geopolitical tensions. Concerns about potential conflicts in the Middle East, such as an attack on Israel by Iran or its proxies, have further contributed to market uncertainties. Moreover, ongoing supply cuts by OPEC+ have tightened the global oil market, driving prices higher and fueling speculation of a return to $100 per barrel.

The surge in oil prices not only strengthens the US dollar trend by fueling global inflation but also prompts increased demand for the dollar from local importers purchasing materials. This double impact exacerbates the pressure on the South Korean won, leading to expectations of further depreciation in the near term. The combination of external economic pressures and domestic political uncertainties underscores the challenges facing South Korea's currency and economy.

The South Korean won faces mounting challenges amidst a complex economic and geopolitical landscape. Rising oil prices, geopolitical tensions, and domestic political developments pose significant risks to the currency's stability and economic growth prospects. Proactive measures are essential to mitigate these risks and safeguard the resilience of South Korea's economy in the face of external shocks.

Source: Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Ukadike Micheal

Economic

Stocks

During the week ending April 5, foreign investors seized opportunities in Japanese stocks, capitalizing on discounted prices resulting from profit booking by domestic institutions in late March. They injected a net 829.45 billion yen ($5.42 billion) into Japanese equities, marking a sharp reversal from the prior week's net selling of about 1.18 trillion yen.

Concurrently, domestic institutional investors withdrew a net 334.8 billion yen from Japanese stocks during the same period. Notably, the domestic cash equity markets saw a net influx of 1.18 trillion yen in overseas capital, the highest weekly inflow since at least 2018. However, foreigners offloaded about 352.68 billion yen worth of derivative contracts. Overseas Investors Seize Japanese Stocks at Discount Prices_1

Overseas Investors Seize Japanese Stocks at Discount Prices_1

Last week, the Nikkei shed 3.4%, its most significant weekly decline since December 2022, amidst profit booking and concerns over potential intervention by Japanese authorities in the currency market. The market sentiment was further dampened by a sell-off in Fast Retailing stocks due to worries about slowing domestic demand at its flagship Uniqlo brand, resulting in Fast Retailing shares losing 6.32% during the week, the largest decline since January 2023.

Despite the recent downturn, the Nikkei continues to trade above a support line formed since February 21, bolstering expectations of a potential rebound. Foreigners sold 349 billion yen of long-term Japanese bonds, marking the second weekly net selling in three weeks, according to data from the Ministry of Finance.

Conversely, Japanese short-term debt securities attracted a robust 4.39 trillion yen in foreign inflows during the week, the highest amount since January 5. Meanwhile, Japanese investors shifted their focus to purchasing 346.4 billion yen of long-term foreign bonds, in contrast to the net selling of 1.66 trillion yen in the previous week. Overseas Investors Seize Japanese Stocks at Discount Prices_2

Overseas Investors Seize Japanese Stocks at Discount Prices_2

However, Japanese investors continued their net selling trend in short-term debt instruments, withdrawing a marginal 3.1 billion yen for the third consecutive week. The dynamic interplay between foreign and domestic investors in Japanese markets reflects the evolving sentiment and investment strategies amidst fluctuating market conditions.

The surge in foreign investment in Japanese stocks amidst a backdrop of profit booking and market volatility underscores the resilience of the Japanese equity market and the attractiveness of value opportunities for foreign investors. However, ongoing uncertainties surrounding currency interventions and domestic demand dynamics pose challenges to market stability and investor sentiment.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Ukadike Micheal

Economic

Forex

Political

A resurgence in US inflation poses a significant challenge to Joe Biden's re-election campaign, complicating his efforts to tout his economic accomplishments and defend his record against criticisms from Donald Trump. The 3.5% annual increase in the March consumer price index, following a 3.2% gain the previous month, undermines Biden's narrative of steady inflation reduction since its peak in 2022.

The sudden uptick in inflation threatens to delay anticipated interest rate cuts by the Federal Reserve, potentially prolonging high borrowing costs for American households. Despite the creation of over 15 million jobs under Biden's administration, the persistent inflationary pressures have overshadowed his economic stewardship, emerging as a significant vulnerability ahead of the November election.

While White House officials anticipate a temporary setback in inflation reduction efforts, they remain optimistic about the prospects of easing inflationary pressures in the near future. Biden reaffirmed his expectation of Fed rate cuts during a press conference, albeit acknowledging potential delays due to recent inflationary trends.

Although Biden has narrowed the polling gap with Trump in recent weeks, the inflationary surge threatens to erode any gains, given the substantial increase in the consumer price index since Biden took office. Republican critics seized on the inflation data to assail Biden's economic policies, highlighting the disconnect between the White House narrative of a strong economy and the escalating cost of living for Americans.

Biden's economic team emphasizes their commitment to addressing rising prices and proposes policies aimed at alleviating financial burdens on households. However, the political implications of sustained inflationary pressures remain significant, with petrol prices and other factors exacerbating concerns about the cost of living.

Despite the challenges posed by inflation, Democratic strategists remain hopeful that voters will attribute the primary cause to corporate greed rather than Biden's policies. However, the political landscape remains uncertain, with the potential for further inflationary spikes impacting voter sentiment and shaping the trajectory of the campaign.

While market reactions to inflation data prompt speculation about Fed rate cuts, their political ramifications may be less significant than the broader economic trends. Nevertheless, the timing and magnitude of any Fed actions will be closely monitored, as they could influence market dynamics and perceptions of the administration's economic management.

The resurgence of inflation presents a formidable obstacle to Biden's re-election bid, posing challenges to his economic narrative and fueling criticisms from political opponents. As policymakers navigate the complex economic landscape, the political fallout from inflationary pressures remains a key consideration in shaping the outcome of the upcoming election.

Source: Financial Times

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Glendon

Economic

Amazon remains a behemoth in the global market, but assessing its stock requires a deep dive into its various business segments—Amazon Web Services (AWS), advertising, retail, and emerging technologies like artificial intelligence (AI). Here’s an exploration of these areas to determine if Amazon stock is a buy right now.

Amazon Web Services (AWS)

AWS has consistently been a strong performer for Amazon, and its growth seems to be accelerating. After growing 13% year-over-year in the latest quarter, an increase from 12% in the previous two quarters, AWS is expected to continue this upward trend. The end of workload optimization efforts suggests a more stable and possibly more profitable future. Comparatively, Microsoft has reported similar trends, indicating a robust industry-wide demand for cloud services. Analysts are forecasting a 14.9% year-over-year sales growth for AWS, marking significant continued expansion.

Advertising

Amazon's advertising segment has shown impressive growth, with year-over-year increases of 26% and 27% in recent quarters. With the introduction of ads in Prime Video and price increases, another strong quarter is anticipated. Although a significant acceleration isn’t expected, maintaining mid-20% growth is considered positive. This segment remains a lucrative area due to its high margins and is expected to expand further as Amazon integrates more advertising into its streaming services.

Retail

Despite being the largest category, retail is often the most overlooked by investors. Last quarter, retail performance was strong, and trends indicate continued improvement. Much of Amazon’s overall profitability improvements have stemmed from its retail operations, including cost savings and enhanced delivery speeds from its regional hub model. These enhancements are expected to drive further improvements in profitability.

Profitability

Amazon has seen remarkable profitability improvements recently, with operating profits consistently beating expectations. These factors include more favorable shipping rates, lower fuel prices, and a more rational labor environment. The high-margin advertising sector also contributes positively to the overall profit margins.

Artificial Intelligence

Amazon is positioning itself as a leader in generative AI, which is expected to significantly boost revenues in the coming years. As AI technology adoption accelerates, Amazon’s early investments and strategic focus could yield substantial returns. The upcoming earnings report might provide more insights into how AI will shape Amazon’s future strategies.

Market Expectations and Analyst Outlooks

Amazon is expected to report a 12% year-over-year increase in sales, reaching $142.66 billion, with earnings per share expected to rise significantly by 167% to 83 cents, as per FactSet. These figures reflect both the company’s robust growth trajectory and its ability to adapt and capitalize on market opportunities.

Conclusion

Considering the data and prospects across its diverse portfolio, Amazon appears well-positioned for continued growth in its core areas, especially AWS and advertising. The advancements in AI and ongoing improvements in retail operations also support a positive outlook for the stock. While the decision to buy will depend on individual investment strategies and market conditions, Amazon’s stock shows promising signs for those looking for growth and stability in a dynamic market environment. Thus, for many investors, Amazon could indeed be a buy.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Cohen

Economic

Bond

Bonds in Asia slumped after higher-than-expected US inflation supported the view that the Federal Reserve is in no rush to cut interest rates.

Benchmark 10-year yields in Australia and New Zealand climbed by more than 10 basis points. Their Japanese counterpart rose to the highest since November. US Treasuries recovered slightly after a Wednesday selloff lifted the 10-year yield above 4.5% for the first time in five months.

A gauge of global bonds suffered its worst performance since February 2023 on Wednesday, while a Treasuries index showed its biggest decline since August 2022.

Equity futures pointed to a steady open in Europe while their US peers turned flat after a weak session on Wall Street. The S&P 500 fell 1% and the Nasdaq 100 dropped 0.9%. Stocks retreated in Asia but pared losses.

A dollar index was virtually flat after touching its highest level this year Wednesday. The yen inched higher after weakening to levels not seen since 1990 against the dollar in the prior session. The depreciation has sparked fresh speculation Japanese authorities might step into the market to support the currency.

In China, the central bank ramped up support for the yuan against a resurgent greenback by setting the daily reference exchange rate at a level that topped estimates by a record.

The cross-asset moves followed March US core consumer price index, which excludes food and energy costs. The gauge increased 0.4% from February, more than the 0.3% consensus forecasts, to beat expectations for a third straight month.

“The fallout from the hotter-than-expected US inflation read overnight will reverberate across regional equity markets today,” said Tony Sycamore, a market analyst at IG Australia Pty. “Providing a cushion on the downside, weakness in key Asian currencies including the yen and the won, will provide support for the exporters.”

Global Bond Selloff Extends In Asia After US CPI_1

Investors are now signaling the US central bank will slash rates just twice this year, starting in September, less than the most recent Fed dot plot that indicated three 2024 cuts. At the start of the year, market pricing indicated six cuts were expected.

“Easy financial conditions continue to provide a significant tailwind to growth and inflation. As a result, the Fed is not done fighting inflation and rates will stay higher for longer,” said Torsten Slok at Apollo Global Management. “We are sticking to our view that the Fed will not cut rates in 2024.”

Former Treasury Secretary Lawrence Summers went a step further to say that one would have to “take seriously the possibility that the next rate move will be upwards rather than downwards.” Such a likelihood is somewhere in the 15% to 25% range, he told Bloomberg Television’s Wall Street Week with David Westin.

Global Bond Selloff Extends In Asia After US CPI_2

The European Central Bank is set to keep borrowing costs on hold for a fifth meeting while further readying the ground for cuts to begin in June.

Back in Asia, stocks slid in Hong Kong and Australia, while those in Japan and China fluctuated. South Korean shares reversed earlier declines after President Yoon Suk Yeol’s party suffered a significant loss in parliamentary elections.

Chinese consumer prices barely increased from a year earlier last month and industrial prices continued to slump, underscoring the deflationary pressures that remain a key threat to the economy’s recovery.

Australian consumer inflation expectations ticked higher. Rates traders have started pricing for the potential that the Reserve Bank of Australia will end the year with no rate cuts at all.

Elsewhere, oil rose on worries about further conflict in the Middle East. West Texas Intermediate, the US oil price, inched higher after rising more than 1% Wednesday on news the US and its allies believe major missile or drone strikes by Iran or its proxies against military and government targets in Israel are imminent. Gold advanced to trade above $2,340.

Source：Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Ukadike Micheal

Economic

Forex

The recent surge of the dollar against the yen in Tokyo trading has ignited discussions about potential interventions from Japanese authorities, as the currency breached a crucial level not seen in over three decades. This uptick in the dollar's strength was propelled by robust US inflation data for March, which prompted a reassessment of the timing of US interest rate cuts and led to an increase in bond yields and the dollar's value.

Market analysts have been closely monitoring the movement of the dollar against the yen, particularly as it surpassed the psychologically significant threshold of ¥153. This level had previously been identified as a potential trigger for direct intervention by Japanese policymakers, reflecting their concerns about excessive volatility in the currency markets. However, despite the dollar's rapid appreciation, Japanese officials have refrained from categorizing the move as "excessive," indicating a cautious approach to potential intervention.

The divergence in interest rate policies between the US and Japan has contributed to the downward pressure on the yen, with market expectations suggesting that US interest rate cuts may be delayed until at least September. This expectation of a prolonged period of higher interest rates in the US relative to Japan has bolstered the dollar's appeal among investors, further driving its appreciation against the yen.

Historically, Japan has intervened in the currency markets to stabilize the yen's value, particularly during periods of rapid depreciation. However, the effectiveness of such interventions in the current market environment remains uncertain, given the broader factors influencing currency movements. While Japanese officials may conduct assessments of market conditions, including potential "rate checks," they are mindful of avoiding actions that could be perceived as defensive or reactionary.

Currency analysts have noted the challenge facing Japanese policymakers in navigating the delicate balance between addressing currency volatility and supporting domestic economic objectives. Despite warnings about speculative movements impacting the yen, the broad strength of the dollar suggests that immediate action to curb yen depreciation may be met with limited success.

Looking ahead, the interplay of economic data releases, interest rate differentials, and market sentiment will continue to shape the dynamics between the dollar and the yen. Market participants will closely monitor developments in US monetary policy, as well as any signals from Japanese authorities regarding their stance on currency intervention. The evolving landscape underscores the complexities involved in managing exchange rate fluctuations within the context of global economic trends and policy considerations.