The global equity market has become a hostage of oil movement. The correlation is immensely in tandem and it fuels the investor’s appetite for the riskier asset. The strong rally over in the US has also helped Asian markets to secure some gains. Although, the Nikkei index is lacking some of the firepower which other Asian indices has, as the Japanese consumer confidence has shown a very flimsy number yesterday. The Japanese yen has lost an enormous amount of ground against the USD. Most of the currency weakness for the Japanese currency, which took place due to the Bank of Japan’s decision to push the interest lower has evaporated. This element is making the Japanese stock a little less attractive relative to other options.
The dollar has eased off further as investors are pricing in that the Fed may soon relay a message which demonstrates that they are in no rush to increase the interest rate. This was not their initial stance, because the Fed started their decree of raising the interest rate with a view that more interest rate hike will be taking place this year. Although, Goldman Sachs (N:GS) does predict that another three more interest rate hike could be possible this year, but we stand off beat with this view. The Fed cannot afford more volatility in the market, especially the kind which we have experienced at the start of this year, which was nothing more, but the after reaction of the fed rate hike.
The Fed will have to keep their station tuned to offshore channels as well, because their domestic conditions are not the only ones which will precept their decision. They cannot afford to be imprudent to offshore volatility. The ISM data released for the US has played this beat even louder that the frailty is the major theme for the US manufacturing sector and even though the Fed has turned their blind eye initially when they made their decision of augmenting the rate hike, but now they cannot afford to be indifferent.
This has taken more wind out of the dollar nonetheless, it has served as a tailwind for US markets and the same sentiment has dribbled into Asian markets. It is hard to see a scenario under which the Fed drum the beat of another rate hike and Asian markets rally, given the current circumstances. Stability in the oil price and a confirmation that a bottom has been formed, which we have said prodigiously audibly, and a dovish tone from the Fed are the two most essential ingredients to see a rally.
European futures are trading higher as well on the back of the Asian markets. Investors will focus what the president of the European Central Bank will have to say. Mr Draghi, the president of the European central, gave so many clues in his last press conference that more QE could be unleashed in March, but given the economic data since then, he may look to deviate from his initial position and may start to telegraph this message ahead of the time. The services PMI number for Italy, France and Germany were abate yesterday, but the final number for the Eurozone matched the previous reading and the forecast. Although, the manufacturing number also displayed very similar message, but it is the labour market in the Eurozone which has shown signs of strength. This can make the battle ground a little more rough for the president against his German colleagues if he still desires to spur more QE.
Disclosure & Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam