Daily Insights Report 22/03/17

• 31 Mar 2017

22 Mar 2017

A sharp and sudden fall in US financial stocks pushed the S&P 500 down more than 1% for the first time since October, which has added downwards pressure on the Dollar. The 1.2% fall led the S&P 500 to reach 2,344, with the financial sub-index down by 2.5%. The last time this US equity benchmark closed more than 1% lower was on October 11. Market participants believe the reason for this fall is that President Trump’s pro-growth policies could take longer to pass than initially expected. Similarly, there is uncertainty over the path of future interest rates, which are a strong determinant of action in the forex market. Some participants believe that equities were overvalued and that this is simply a correction. In the coming days, the direction of the equity market will confirm one or the other theories. The graph below depicts the index since the past few months.

– The drop in Treasury yields helped push the Dollar index down by 0.7% to reach 99.72. This is the first time the index has fallen below 100 since early February.

– The Euro was up 0.7% at $1.0809 due to an easing of worries about the upcoming French election. Some uncertainty was resolved as the independent presidential candidate Emmanuel Macron came out as the winner from the French presidential debate.

Commodities

– The softer result of the US currency failed to help oil prices. Brent crude weakened by 1.3% and reached $50.96 a barrel, which is not far from last week’s three-month low of $50.25. West Texas Intermediate (WTI) crude on the other hand dropped 1.8% to reach $48.24 a barrel on Tuesday.

– Gold kept in line with steady growth after showing five consecutive days of gains. It gained $10 to reach $1,243 per ounce. This is the highest level seen since the beginning of March.

– Copper fell 1.8% after signs that supply is increasing. Disruptions in the supply chain of copper allowed the metal to increase to the highest level seen since 2015.

Euro (EUR)

Current Account (January)

The Euro Zone current account surplus is likely to see very little change at EUR 31.5 billion for the month of January. This compares with the EUR 31 billion seen in December and EUR 30 billion seen in January 2016. A relatively weaker Euro is supporting exports outside of the single-currency area. The Euro strengthened slightly against the USD in January to about $1.06 but was still weaker than the same month last year where it was at $1.09.

Increased tensions stemming from protectionism from the US, the Brexit negotiations, have clouded the outlook for the Euro Zone’s exports. Similarly, there has been no significant development in domestic demand, especially considering the accelerating inflation – which should keep import growth still. In February, annual CPI growth exceeded the ECB’s target for the first time since January 2013. It is therefore likely that the current account surplus will remain stable in the coming months.

United States Dollar (USD)

Existing Home Sales (February)

The forecast for this data is 5.58 million existing home sales. This is a decline from January’s decade-long high, but still will contribute to steady long-term growth. Sales rose 6.4% year-over-year in January, which is strong since inventory has been limited. Home prices rose at a rate of 5.6% per year. This was shown in the 20-city Case-Shiller index. It is likely that this consistent path of gains will draw more sellers to the market.

New Zealand Dollar (NZD)

Monetary Policy (March)

Forecasts suggest that the Reserve Bank of New Zealand will keep the official cash rate on hold at 1.75% at March’s meeting. The official cash rate has been unchanged since November. Even though concerns about adding fuel costs can be put to rest for the moment, the housing market would be a key factor for the bank when deciding where to keep the cash rate. Domestic demand is fixing itself, and export revenue is up since dairy prices are rising in the world. For these reasons, it is likely that the RBNZ will keep the cash rate steady through this year.