Range of the week : 1.3600-1.4200
A drop in the value of the U.S. dollar and the downturn on equity markets have become recurring themes since the beginning of February. For a second consecutive week, the greenback fell over 1% against the other major currencies, while North American stock indexes were down around 1.0%. The nervousness certainly appears to be spreading, as investors have become increasingly fearful about the international economic outlook. Consequently, investors seeking safety have been reconsidering their asset allocations, abandoning risky assets like equities and corporate bonds and seeking refuge in government bonds. Demand for U.S. and Canadian government bonds brought 10- year interest rates down 9 basis points last week.
Is this a warning signal from the bond market? It is still a bit too early to say that investors are expecting a recession, but clearly few expect a rate increase in the U.S. this year. This is in stark contrast to the beginning of the year, when the market was expecting two or three rate hikes! Many market watchers point to these interest rate movements and changing expectations as reasons for the recent weakness in the U.S. dollar. Also, given the climate of uncertainty weighing on markets, gold, a well-known refuge asset, ended the week up almost 7%, the largest weekly gain since the end of 2008. Gold has climbed by close to 17% since the beginning of the year.
Last week was relatively quiet in terms of economic news. The event that drew the most attention was Senate testimony given in Washington by the Chair of the Federal Reserve. After having repeatedly said that the central bank’s opinion had not changed, she mentioned that in the event of a slowdown, all options will be on the table. In sum, there was hardly anything new.
Turning to commodities, there were two major events last week. First, the price of crude oil fell dramatically, to just above USD 26/bbl on Thursday, its lowest price in close to 13 years. However, Friday brought a dramatic reversal, with oil climbing over 11% to end the week above USD 29/bbl. The strong rally was due to comments made by the energy minister of the United Arab Emirates, who repeated OPEC’s willingness to enter into talks with other oil producin countries on production cuts. This was the second consecutive week that members of OPEC said they were willing to cooperate to stabilize oil prices. For now, OPEC has not scheduled a special meeting on the subject. But over the next few weeks this story risks to have a major influence on crude oil prices.
This week will be more charged with economic news in North America. In the U.S., the producer price index and the industrial production indicator will be released on Wednesday, followed by the consumer price index on Friday. In Canada, news on retail sales growth is expected on Thursday, and Canadian inflation data will be released on Friday.
