By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
In the US, equity markets erased all their gains from 2012 with the Dow Jones closing -3.35% lower at 12’118.57 with the S&P closing the week well below the 200 day moving average, closing -3.75% at 1’278.04.
Commodity markets feel the pressure of uncertainty
Commodity markets were not spared; perhaps the largest loser on the week was the West Texas Intermediary Crude contract shedding -8.57% to close at 83.20, its lowest level since October 2011. Gold, after remaining sluggish earlier in the week broke out of its 1550-1575 channel to close the week at 1623.41, a gain of 3.08%.
Turning to the currencies, despite its selloff on Friday, the US Dollar maintained its gains against the majors, moving to a two year low against the Euro at 1.2435 and 1.5362 against the British Pound. With such a large inflow into safe havens during the week, it was all about flight to safety – US treasuries fell to a historical low of 1.467%, the lowest level in a century. Similarly, the yield on the 2 year German note fell to -0.012%, which would mean one would have to pay the German government to hold one’s cash!
US non-farm payrolls data disappoints markets
Friday’s US Nonfarm payrolls was the highlight of the week and it was a major disappointment to say the least. With the markets expecting 150K new jobs, the report showed only 69K were added during May and more alarmingly, April’s reading was revised down to 77K jobs added, down from 115K. Private payrolls dropped to 82K, down from 164K expected with a downward revision to April’s reading to 87K from 130K. The report showed patchy jobs growth for a third consecutive month running, however May’s figure was the lowest reading since May 2011 when 54K jobs were added. To add to the woes, it was the first time in four months that the previous figure was revised downwards. The overall unemployment rate increased to 8.2%, the first increase in the figure since June 2011. The weakening unemployment rate was attributed to an increase in the participation rate as 642K new workers joined the civilian labour force, the most since November 2007.
The dismal report will no doubt re-fuel speculation that the Fed will force their hand into introducing a third round of quantitative easing to kick start a stuttering US recovery – and the weakening of the US Dollar following the announcement suggested this. Gold gained 4.04% after the announcement while the Euro bounced from an intraweek low of 1.2288 to close Friday’s session at 1.2435. Thursday’s weaker US GDP reading (growth slowed to 1.9% as expected, down from a previous reading of 2.2%) combined with this most recent jobs report will no doubt be the final nail in the coffin of the QE3 debate. Going forward, markets will turn to the Fed and their comments to determine the size and time frame of additional easing measures. With the Fed set to meet during June 19 & June 20, speculation will be rife that an announcement will be made during this meet as their dovish tones will keep the US Dollar anaemic.
Euro unable to take solace from US data releases
Despite the 147 point upward move in EURUSD on Friday, the Euro had little to take confidence from this week. Risk appetite remained in check as the recapitalization of several Spanish lenders dominated headlines. Uncertainty regarding Bankia, the fourth largest lender in Spain, kept any gains in the Euro on hold as the ECB intimated that its liquidity operations would not be available to recapitalize the troubled lender. It is estimated that Spanish lenders are sitting on approximately €180 billion in bad debt. As a result, yields on the Spanish 10 year bond widened to a six month high of 6.656% before settling at 6.53%.
It is important to note that levels of 7% are highly unsustainable and Ireland, Greece and Portugal encountered similar yield levels at the time of their bailouts. Further weakening the Euro was a disappointed bond auction from Italy on Wednesday – the auction saw yields increase very sharply to 6.03%, up from 5.84% on the 10 year bond. Yields on the 5 year similarly increased to 5.66% from 4.86%. With industrial confidence in the EU dropping (Act -11.3, Exp -10.2, Prev -9), consumer confidence dropping (Act -19.3, Exp -19.3, Prev -19.3), and manufacturing activity in the Euro-zone also on the decline, all eyes will turn to Wednesday’s ECB announcement.
The ECB is plagued with a stubbornly high unemployment rate of 11% (the highest since 1995) and with consumer prices also weakening across the Euro-zone (Act 2.4%, Exp 2.5%, Prev 2.6%) speculation is rife that the ECB might have a re-look at their rates during the upcoming meeting. Although this action may seem premature, it would be no surprise if the ECB announced modifications to its monetary policy during the meet in an effort to re-inject liquidity into a region which is on the verge of contraction (and collapse). Along with the ECB’s press conference, we continue to watch the performance of Spanish and Italian bond yields to gauge the upcoming pricing action of the Euro this week.
Central banks to re-examine rates
Along with the European Central Bank, the Reserve Bank of Australia, the Bank of Canada and the Bank of England will also be announcing their rates. With the landscape of the markets so drastically altered since the last time these banks convened, further rate cuts cannot be ruled out, particularly by the RBA, the ECB and the BoE. The later could have a look at increasing their asset purchase target by an additional £25-50 billion. Looking forward, expect the US Dollar to remain under pressure as speculations surrounding QE3 mount.