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View from London: Has US Dollar Found the Bottom?

10/03/2017 11:51 am EST


Robert Savage

Partner & CEO, CCTrack Solutions

Many are expecting the USD to fail again in October with FOMC on hold, ECB still hawkish and U.S. politics likely much uglier than in September, writes Bob Savage, CEO of Track Research in his Sunday commentary.

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Market Recap: New record highs for equities despite fears of 3Q rotation pressures and reallocation.  U.S. real GDP in 2Q revised to 3.1% and consumer spending up 3.3% helped offset some of the gloom, along with corporate profits rising to 7.4% y/y.

U.S. consumer confidence holds – 119.8 – slightly below expected – but still strong. U.S. durable goods orders rose 1.7% m/m with core up 0.9% - adding to 4Q outlooks – and the Chicago PMI rose to 65.2 from 58.9 – far better than the 58.5 expected. 


On the negative side for the U.S. – pending home sales -2.6% m/m, new home sales slow to 560,000 from 571,000 rate – weaker than 583,000 expected. Jobless claims rose to 272,000 from 259,000 – clearly still hit by hurricane noise and the Chicago Fed national index fell to -0.31 – weakest of the year.

Equities: The MSCI all-country World index rose just 0.05% on the week, 1.66% on the month, and 4.68% on the quarter. The MSCI EM fell 1.27% on the week, rose 0.11% on the month and 8.2% on the quarter. The big 8 bourses saw gains this week. The week ahead starts with S&P500 seeing 7 companies reporting with 3Q guidance still well above historic norms. 

The U.S. S&P500 rose 0.68% to 2,519.36 on the week – with new record highs set Friday at 2519.44, for the month the index rose 1.73% and for 3Q up 3.96%. The DJIA rose 0.25% to 22,405.09 on the week – with new record highs at 22,419.51 – up 1.9% on the month and 4.94% on the quarter. The NASDAQ rose 1.07% to 6,495.96 on the week – with new record highs at 6.497.98 on Friday – up 0.94% on the month, and 5.79% on the quarter. The CBOE VIX closes 9.51% off 44pp on the week, off 62pp on the month and off 171pp on the quarter – holding well below the 200-day average.

The Stoxx Europe 600 rose 1.29% to 388.16 on the week, up 3.2% on the month and 2.32% on the quarter.  The week saw Sweden outperform with the OMX up 2.31% to 1637.82 while the Swiss Market lagged up jU.S.t 0.23%. For the month Germany outperforms up 5.65% while UK FTSE lagged off 0.88% and for the 3Q it was Italy by a long shot up 10.26% while Spain fell 0.6%. For the big 3 bourses of Europe, UK FTSE rose 0.85% to 7372.76 on the week off 0.88% on the month and up 0.82% on the quarter. The German DAX rose 1.88% to 12,828.86 on the week, up 5.65% on the month and 4.09% on the quarter. The Italian MIB rose 0.74% to 22,696.32 on the week, up 3.83% on the month and 10.26% on the quarter.

The MSCI Asia Pacific fell 1.13% to 161.17 on the week, up 0.16% on the month and 4.25% on the quarter. The worst losses on the week were in India, the Nifty 50 lose 1.76% to 9,814.30, off 1.86% on the month and up 2.81% on the year. The best gains were in Thailand up 0.8% on the week, up 3.38% on the month and 6.25% on the quarter while Japan Topix was a close second up 0.61% on the week to 1674.75, up 3.41% on the month and 3.9% on the quarter. Japan Nikkei 225 rose 0.29% to 20,356.28 on the week, 3.38% on the month and 1.61% on the quarter. Hong Kong Hang Seng also fell 1.17% on the week, off 1.43% on the month and up 6.95% on the quarter. China Shanghai Composite also lost last week off 0.11% to 3348.94, off 0.54% on the month and up 4.9% on the quarter. The Korea Kospi rose 0.24% to 2,394.47 on the week, up 1.56% on the month and up 0.11% on the quarter. The Australian ASX rose 0.07% to 5,744.90 on the week, lost 0.71% on the month and 0.33% down on the quarter.

Fixed Income: The selling of fixed income continued last week though the move was more about the curve than overall all rates as the focus shifted to odds for a U.S. tax deal leading to more deficits along with stronger data globally leading to more hike expectations into 2018.  The U.S. auctions were weak for the 2Y and 5Y but the moves helped make the 7Y a success.  The move up in rates leaves the 10Y yields jU.S.t above the 200-day at 2.326%.  For Japan, the jump up in JGBs was notable but less exciting with BOJ leaving buying plans unchanged. 10Y JGBs are up 3bps on the week to 0.05% but off 2bps from the start of 3Q.  China seemed to snug rates into the Golden National week holidays – 10Y ends at 3.61% up 6bps on the quarter.  The EU bond markets last week were all about the data and equities with banks helping stabilize some of the periphery while ECB tapering expectations shifted down a bit on the lower than expected HICP. ECB comments remain critical as does the level of the EUR for next set of moves – with German coalition building and PMI reports also driving.

U.S. Bonds see curve steepening with focus on tax reform, U.S. growth – For the week - 2Y up 5bps to 1.483%, 3Y up 5bps to 1.622%, 5Y up 7.5bps to 1.935%, 10Y up 8.5bps to 2.335%, 30Y up 8bps to 2.86%.  Interesting to note that U.S. bonds aren’t that different from the start of 3Q up jU.S.t 3bps but with a wide 2.01%-2.40% range.

Conclusions: Has the USD found a bottom?  Betting odds are even – with bias to return to the 200-day average about 5% from here. The question of the USD matters for inflation outlooks into 2018, and it matters for the relative appetite global investors have for U.S. assets.  The weakness of the USD was the story of 2017 but not of September and now we have the 4Q and the possibility of a USD return to pre-summer pain levels.  The ECB clearly is watching the USD as part of its QE tapering reaction function. The BOJ similarly likes a weaker USD but not much above 120. The EM world suffered the most from the USD move up in September it might be the key for understanding 4Q flows as U.S. rate squeezes higher hurt EM growth outlooks but in a more differentiated way than in 2014 or 2015. Many are expecting the USD to fail again in October with FOMC on hold, ECB still hawkish and U.S. politics likely much uglier than in September. For the technicals, the U.S. dollar index at 94.35 looks important and that makes sense to watch for confirmation in the next week or so if the USD really is set for a breakout.

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