TheFXSpot: Risk Appetite Likely To Improve Despite Fri Unwinds
19-Oct-2012
By Vicki Schmelzer
NEW YORK, Oct. 18 (MNI) - Risk appetite is likely to improve more
markedly in the coming months if global data sets improve and markets
calm down after the U.S. elections, traders said
They brushed aside the paring and squaring of positions being seen
Friday as largely consolidative and not the start of a corrective trend.
In the past month, and more recently this week, the market's worst
fears have been allayed, and the result has been an increasingly
'risk-on' trading environment.
Spain and Greece are now simmering nicely on the back burner, with
peripheral yields steadily edging lower and eurozone officials making
progress on banking supervision and fiscal matters.
U.S. data sets have been more upbeat recently, with economists
raising their Q3 GDP growth estimates for next Friday's GDP release to
2.0% from earlier estimates of 1.8% (MNI median at 2.0%, range +0.5% to
+2.7%).
The final leg of the three-legged stool was China, where the past
week's data releases have been mostly positive and far more supportive
of growth than had been previously expected.
These happenings have been risk supportive this week and while
profit-taking and U.S. stock selling put a damper on risk assets Friday,
the sense is that, going forward, the bias may now be to the upside in
terms of U.S. yields and stock and commodity prices.
In shifting their focus from the eurozone and China, the market has
homed in on the United States, with the fiscal cliff and the November
elections hot topics of debate.
New York Post writer John Crudele quipped this week that "when you
vote for president in 19 days, you aren't really voting for Obama/Biden
or Romney/Ryan."
"The real tickets are Obama/Bernanke and Romney/Not Bernanke," he
said.
Crudele, and others this week, maintained that the outcome of the
November election could have big time ramifications for the U.S. bond
market.
In a research note Friday, BOA Merrill Lynch strategists
painstaking laid out all the possible permutations of an Obama versus
Romney win and party controls in the House and Senate.
An Obama win, with a split Congress, could mean the fiscal cliff
would hit harder, with 10-year U.S. Treasury yields then likely to slip
back to lows near 1.40%, with a flatter curve, they said.
" A Romney victory with a split Congress should mean that
expectations of a postponement of the cliff and tax cuts across the
board increase in the near term," the strategists said.
"In this case, we believe that the market will still be in a
risk-on phase and 10 year rates might rise to 2%," they said.
A Republican sweep, if seen in tandem with a change in Fed
leadership (non-Bernanke), "could result in a significant rise in rates
and we may see the 10-year reaching 2.25% in a knee-jerk move," BOA
Merrill said.
Among the chatter of the week, market players pondered if Bernanke
would leave before his term expired in January 2014, or if a Romney win
might mean more hawkish members being nominated to the Fed board.
These big picture issues will only unfold in the months to come, so
the traders tried to focus on what next week will bring.
Andy Busch, global currency and public policy strategist at BMO
Capital Markets, said of next week's line-up (Spanish regional elections
Sunday, final U.S. presidential debate Monday, HSBC's flash China
PMI/BOC decision Tuesday, ECB Draghi addresses German Parliament/Fed
meeting Wednesday, etc.) "China PMI and Draghi's speech will be the
most compelling to observe."
Draghi will outline his OMT plan and its effects on European
sovereigns, with risk that the ECB President "will sound more hawkish to
assuage the German politicians," he said.
Regarding HSBC's flash PMI, Busch reminds that manufacturing PMI
has been below 50 for 11 months and is expected to stay there in
October. (MNI's flash China business sentiment was released Friday,
showing mild improvement, see MNI mainwire at 7:12 a.m. ET)
"Given this week's generally positive data, the number will have to
be +49 to generate upside risk-on trading activity," Busch said.
"The bigger risk is if it (HSBC flash) comes in lower, as it will
call into question the veracity of the data previously released," he
said.
Next week, the Bank of Canada is expected to keep rates steady at
1.0% Tuesday, although the accompanying statement will be closely eyed
for dovish/hawkish undertones.
The BOC will give full details of its domestic and global analysis
in its quarterly Monetary Policy Report a day later.
In Europe, German IFO and EMU flash PMIs, due out Wednesday will be
closely eyed, as will U.S. durable goods (Thursday) and Q3 GDP data.
Very little was being mentioned about the U.S. Federal Reserve,
which meets October 23 to 24.
Market thinking is that after announcing QE3 in September, the Fed
will want to lie low until after the November election, although some
players wonder if the central bank statement will acknowledge the better
data seen recently, especially in U.S. housing.
(See Federal Reserve State of Play by Steve Beckner for details)
Friday saw widespread, albeit selective selling of risk assets,
with some instruments (tech stocks) harder hit than others.
The Nasdaq Composite closed down 2.19% at 3005.62, after trading in
a 3000.27 to 3066.56 range.
After breaking below its 55-day moving (3088 Friday), the index is
fast approaching its 100-day moving average, around 2997 currently. The
Nasdaq last closed below its 100-day August 2.
Other risk instruments, including U.S. Treasury yields, the dollar,
and commodities continued to explore well established ranges.
U.S. 10-year Treasury yields were closing around 1.7675% Friday,
down from the 1.8349% high seen Thursday, and up from the 1.663% close
seen a week ago.
Dollar-yen, which has moved largely in tandem with U.S. yields in
recent sessions, was closing at Y79.30, on the high side of this week's
range of Y 78.30 (Monday) to Y79.45 (Thursday).
The euro, closing at $1.3024 and down from Wednesday's peaks around
$1.3140, maintained a toehold over $1.3000 despite heavy selling.
In commodities, NYMEX November light sweet crude oil futures
settled down $2.05 at $90.05 per barrel after trading in a $89.93 to
$93.05 range, while ICE Brent settled down $2.28 at $110.14 per barrel
after trading in a $110.05 to $113.27 range.
While the front WTI contract has been trading below its 200-day
moving average ($95.81 Friday) since mid September, on expected excess
U.S. supply, this is the first time since October 8 that Brent has
closed below its 200-day ($112.24) |
