Stocks rallied significantly through the second half of the first quarter but have been dropping back this week with some traders concerned about valuations heading into earnings season starting next week with Alcoa and major US banks set to kick things off as usual. Considering that many companies guiding low was one of the reason for the big January selloff, that the US economy has done well in the first quarter, and that confession season has been unusually quiet this time around with very few profit warnings, there good potential for a number of positive surprises this earnings season. Because of this, current stock market weakness appears to be a normal trading correction to ease overbought technical conditions rather than a new downturn.
On the interim, however, we’re seeing a clear shift of capital out of risk markets and back into defensive havens. The biggest beneficiary of this is JPY which has been screaming higher relative to USD and EUR. Perhaps the biggest questions heading into today’s Asia Pacific trading session is over whether or not the Bank of Japan will intervene in some way to try and block the advance or not?
Crude oil has dropped back about 2% today after rallying over 5% at one point yesterday. RUB and NOK are holding up well relative to USD while CAD is off moderately indicating that traders see this setback for crude as a normal trading correction and not a new downturn.
Another headwind for US markets today has been the growing realization that the Fed appears to be serious about raising interest rates at least twice this year. Yesterday’s Fed minutes showed a real split between those wanting to raise interest rates this month and those wanting to take it slow. Comments this week from St. Louis Fed President Bullard and Boston Fed President Rosengren, a hawk and a dove, indicating frustration with markets pricing in less than two rate hikes could be seen as a signal increases are coming. While April remains unlikely, there could be a lot of pressure from inside and outside the Fed on the central bank to make a move in June.
Tonight, in a very rare event, four current and former Fed Chairs (Yellen, Bernanke, Greenspan and Volcker) will be speaking at the same event, which could give an indication of how central bank thinking has evolved over the last 35 years. It’s unlikely anything substantive about future policy will come of this but if there is a surprise comment, it could have an influence on trading. Later on, KC Fed President George, the hawkish dissenter from March is speaking as well.
There are several economic announcements of note tomorrow. UK industrial production and trade data may attract attention from traders looking for indications of whether the Brexit debate has had as big an impact on the economy as it has been having on currency trading.
Canada employment may spark trading interest in the Loonie Friday morning as well, as it’s the last major data point before next week’s Bank of Canada meeting. Last month total jobs fell by 2K as full time jobs fell by 52K. The street is expecting a 10K increase this time. I think we could see a small 5K decrease because I suspect the oil rebound won’t lead to callbacks as quickly as the oil crash led to layoffs especially heading into breakup. Also, the rebounding loonie may have held some hiring back in other sectors. I think it would take a surprise drop of 25K or more for the Bank of Canada to consider cutting rates next week.
There have been no major announcements after the US close today.
Significant announcements released overnight include:
US jobless claims street 270K
US natural gas street 7 BCF
UK Halifax house prices 10.1% vs street 9.5%
Spain industrial output 2.2% vs street 3.0%
Norway industrial production (1.8%) vs previous (0.2%)
Greece unemployment rate 24.4% vs street 24.0%
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montré al, 12:30 am in London and 8:30 am in Singapore)
5:30 pm EDT FOMC Yellen, Bernanke, Greenspan and Volcker speaking
8:15 pm EDT FOMC George speaking
7:00 am BST Germany trade balance street €18.0B
7:45 am BST France industrial production street 1.7%
9:30 am BST UK industrial production street 0.0%
9:30 am BST UK manufacturing production street (0.7%)
9:30 am BST UK trade balance street (£3.4B)
10:00 am BST Greece industrial production street 2.1%
10:00 am BST Greece consumer prices street (0.6%)
3:00 pm BST UK NIESR GDP estimate previous 0.3%
8:15 am EDT Canada housing starts street 190K
8:30 am EDT Canada employment change street 10.0K vs previous (2.3K)
8:30 am EDT Canada full-time jobs previous (52K)
8:30 am EDT Canada part-time jobs   previous 49K
8:30 am EDT Canada unemployment rate street 7.3%
8:30 am EDT FOMC Dudley speaking
1:00 pm EDT US Baker Hughes drill rig count previous 450