Volatility has been front and center in 2016, with equity markets rebounding in the past week, sending yields higher and precious metals lower. The recession fears that knocked equities sharply lower to start the year were calmed considerably last week thanks to a number of contributing factors, including a rebound in oil prices, stability from China, improved economic data, and bullish central bank expectations. Asia's MSCI Pacific index surged 5.8% for its best weekly advance since 2011, although the rebound was from a 3-1/2-year low the week prior. The S&P 500 had its best weekly performance of the year, up 4.9%, after posting better than 1% gains for 3 straight sessions. European bourses were relative underperformers, however, with the Euro Stoxx index rising 4.2%.
The increase in risk appetite weighed on bonds, though only moderately as risks are still abound. Recession concerns have waned, but there are still many headwinds that threaten. Oil prices rebounded and stabilized after the Saudi-Russia pact to freeze production, albeit at record levels. China's stronger yuan fixings consoled, but the ultimate ability of the authorities to command and control outcomes is unlikely, especially against global market forces. Meanwhile, "Brexit" has become the new worry after an extraordinary UK cabinet session on Saturday concluded with the announcement of a June 23 EU referendum.
Perhaps the most potent source of volatility has come from central banks. They contributed to improved investor sentiment while exacerbating gyrations. The stimulus from the BoJ and PBoC this year, the promise of more QE from the ECB ahead, and the delay in FOMC and BoE tightening, have all impacted bond, stock, and currency markets significantly. Indeed, the shift to negative interest rates from the BoJ, and the talk of similar action from the Fed, caused a major stir, and especially in the banking sector.
Macro fundamentals will be back in the spotlight this week now that the financial markets have stabilized somewhat, and as global data calendars are heavy with key reports. From the U.S. there's revised GDP, income, consumption, orders and housing reports to be digested, along with a numbers of Fedspeaks set to discuss monetary policy and the economic outlook. Europe's slate includes GDPs, PMIs, and confidence reports, all of which will play an important role in the upcoming ECB decision. The Asian agenda is loaded with inflation, trade and growth data.
The Euro reversed course moving lower last week, as the dollar gained traction following yields higher. Resistance is seen near the October highs at 1.1495. Support on the currency pair is now seen near the 10-week moving average at 1.0960. Momentum has turned positive with the MACD generating a buy signal. This occurs as the spread (the 12-week moving average minus the 26-week moving average) crosses above the 9-week moving average of the spread.
The GBP/USD currency pair moved lower on general dollar strength late in the week after retreating resistance near the 10-week moving average at 1.4518. Target support is now seen near the January lows at 1.4070. Momentum remains negative with the MACD (moving average convergence divergence) index printing in the red but the trajectory of the index has flattened reflecting consolidation.
