Stocks tumble

BBH CurrencyView

  • The dollar is firmer against nearly all the majors amid risk aversion; European stocks at a 6-day low.
  • Markets are likely to focus on the US data in today’s session; downside surprise supportive of USD.
  • PBOC expects to see less upward pressure on inflation; Indian inflation keeps RBI in tightening mode.

The dollar is firmer across the board against the majors as market sentiment continues to deteriorate amid concerns over the euro zone banking sector. The EuroStoxx 600 is down 2.3% (at a 6-day low) with banks down over 3.5%, while S&P futures imply a 1.7% loss at the open. As a result, the euro maintains a heavier tone against the dollar, down nearly 0.5%, with growth-sensitive currencies, such as the Australian dollar, declining the most in the G10. Surprisingly, sterling’s decline was limited (down 0.3%) after UK retail sales were a notch below expectations with the retail sales deflator the highest since 2008 yet overall the trend in retail sales suggests that retailers face difficult conditions as domestic demand remains subdued. Oil prices remain soft as the focus shifted back to the growth outlook in the absence of fresh developments.

Today’s North American session is likely to be driven by the outcome of this morning’s important US data reports, including the Philly Fed, initial jobless claims and CPI. Of the three, inflation is generally one of the most widely followed and will be closely monitored over time to assess the probability of QE3. Yet in our view given the regional Fed indices role as a harbinger for current slowdown back in May, today’s report is expected to draw a bit more attention than usual, with an upside surprise likely to have the potential to send a contrarian signal in the weeks ahead. In fact, according to the distribution of economic forecasts, the market is positioned for a downside surprise below the consensus of 2. That indicates, an upside surprise is likely in part to result in a rebound in risk appetite and may provide the momentum for the S&P to break the important psychological barrier or 1200. At the same time, many are also expected to closely monitor initial jobless claims, which of late have become an important high frequency report to measure the pulse of the real economy. Indeed, despite trend of weak data releases in the US over the past few months, the trend in jobless claims is telling of a more much positive story in the US labor market than many observers suspect. The 4-week moving average, for instance, remains in a downward trend after peaking near 440k in mid-May and currently stands at 405k. All told, a positive surprise in claims and Philly Fed would be needed to alter today’s negative sentiment but over the medium-term further improvement in this data would goes some ways towards alleviating some of the recent fears in regards to the outlook for the US economy. In our view, today’s US data and the subsequent market response are key for the price action in the dollar bloc and the euro in particular. CAD is likely to be the most sensitive to US economic data, given Canada’s trade links to the US economy, while positive US data would also be supportive of NZD and AUD as well and vice versa. The EUR remains confined to its recent range of $1.40 – 1.45 and likely to be sensitive to US data as well, with consistent positive US data surprises going forward likely necessary to the EUR to break the upsides of this range.

Comments by PBOC official Zhu Weiliang suggesting that inflation may see less “upward pressure” strengthens our view that the non-FX part of the Chinese tightening cycle is coming to an end soon. Headline inflation is still elevated at 6.5% yoy, but many underlying items are showing signs of peaking. We still think that the some residual tightening is warranted, especially in deposit rates, but we are closely watching for signs of a change in official communication. Inflation data from India highlights the need for the RBI to continue tightening, despite the sharp drop of local interest rate futures recently. INR has been the worse Asian currency month to date, largely due to the negative sentiment towards equity markets and the lack of official support. In contrast, several countries in the region have made strong comments or taken actions to reduce currency volatility during times of stress. Still, we think that when markets finally calm down, INR will be in a good position for a rebound given INR’s very favourable carry and low dependence on exports compared with regional peers. We expect the Chilean central bank to keep rates steady at 5.25% in today’s meeting, in line with consensus. Inflation pressures seem to have stabilized and real sector data has come in mixed recently. Still, it is not clear that the tightening cycle is over yet. The bank may still opt for one more hike later this year to further anchor inflation expectations.

Data Reports

Time Country Report   Survey Prior
8:30 US CPI m/m 0.20% -0.20%
8:30 US Core CPI 0.20% 0.30%
8:30 US CPI y/y 3.30% 3.60%
8:30 US Core CPI 1.70% 1.60%
8:30 US Jobless Claims 400K 395K
8:30 US Cont. Claims 3.7M 3.68M
8:30 CA Leading Ind. 0.20% 0.20%
8:30 CL GDP Q2 6.50% 9.80%
10:00 US Leading Ind. 0.20% 0.30%
10:00 US Philly Fed 2 3.2
10:00 US Existing Home Sales m/m 2.70% -0.80%
18:00 CL Target Rate 5.25% 5.25%

Economic/Earnings Events

Time Country Event
10:30 CA BoC Review Published
13:00 US Fed to sell $12bln
14:30 US Fed’s Dudley to speak

Currencies 2011-08-18

1 Comment
  1. David Lazarus says

    The markets are just showing that the fundamentals of many companies simply do not warrant the rating that they have. We are basically in central bank inflated bubble in a depression and as these measures fail the PE will fall to a level more normal of a depression. That would be PE below 10 and in some cases a lot lower. The returns on stocks need to be higher than treasuries because of the risks.

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