Notable events over the last week
- Over the weekend, the PBoC Governor Zhou Xiaochuan suggested that capital controls were not being considered by the bank and that further exchange rate depreciation is unlikely to be required. The communication should to be welcomed by markets, which have long been left in the dark regarding the bank’s intentions. The announcement followed the Spring Festival holiday retail sales numbers which were out on Saturday, showing sales picked up 11.2% YoY up from 11% in 2015.
- In the US, Yellen reiterated the message of many Fed speakers earlier in the month, acknowledging market concerns emanating from tightening financial conditions, during her semi-annual testimony to the House Financial Services Committee. The overall tone was dovish suggesting that ‘financial conditions in the US have recently become less supportive of growth, with declines in broad based measures of equity prices and further appreciation of the dollar’. There remained a focus on China, recognising the intensifying uncertainty around growth prospects, as well as the role of oil prices. The statement did little to change market expectations with the probability a hike this year still around 30%.
- There was slightly more positive news towards the end of last week in the US as January retail sales rose a better than expected 0.2% and December sales were revised up to 0.2% from the previously reported -0.1%. Expectations had been for a 0.1% increase and gains were attributable to ex auto (+0.1% mom vs. 0.0% expected) and ex auto and gas (+0.4% mom vs. +0.3% expected). In contrast to the positive sales data, the University of Michigan consumer sentiment showed a 1.3pt decline from January to 90.7 (vs. 92.3 expected) with both current conditions and expectations indices edging lower.
- In Japan, markets were plagued by negative sentiment which saw the Yen surge to near 15 month highs against the dollar. The Nikkei plummeted over 10% last week, as markets questioned the effectiveness of monetary policy. The shift towards negative rates, indicated by the BOJ policy actions late in January, led to concerns surrounding the profitability of the banking system and whether the BOJ has exhausted its stimulus toolbox.
- European banks also had a fairly torrid week, largely driven by the sell off in Deutsche Bank as concerns surrounding the bank’s creditworthiness to repay debt obligations grew. The bank was down 39% YTD, although picked up slightly towards the week’s close. The current bank sector sell off is largely a function of deteriorating income statement expectations rather than broad balance sheet concerns, as fading nominal growth expectations, falling sovereign yields and flattening curves combined with negative interest rates and weak fee income trends all weigh on the outlook for earnings.
- In what could be the most significant move of last week, the price of Gold rallied on the back of last week’s market volatility, gaining as much as 5% in one day and closing the week up at $1,238/oz, +17% YTD. A flight to quality and economic uncertainty are the most likely causes for such a price climb. This now puts Gold at an all-time high at around 44 times the price of Oil, despite a 12.32% Oil rally on Friday. For comparison, the ratio was at 6.6 in June 2008 and only 12 in May 2014. The Oil price jump was most likely the result of rumours that OPEC stands ready to co-operate on production cuts, however the gain failed to recoup the losses earlier in the week, closing down 4.69%.
Coming up this week (Source Bloomberg)
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