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Macro Roundup – March I

By Colin Lloyd 

The Trump correction of January appears to have run its course. This is evident in the rebound of the US$ Index. US stocks remain ascendant, reaching all-time highs at month end. US bond markets, meanwhile, remain range-bound, reluctant to give up the yield increases seen since the November election. In Germany, Bund yields declined.

Currencies

The US$ Index hit its lowest level since the November election on 2nd at 99.19, only to recover. By the 15th it had tested its high at 101.75.

EURUSD followed a similar pattern of consolidation after testing a high of 1.0829 on 2nd – not far from the December high of 1.0873. It closed the month near its low at 1.0577.

USDJPY remained strong despite the EURUSD decline. During the month it traded in a narrow 3.5 point range, closing almost unchanged at 112.78.

USDCNH also consolidated after testing its low at 6.7916 on 3rd. The Chinese devaluation has fed through to the Chinese economy over the last few months. Official intervention is likely to keep the currency locked into a narrow range, at least, until the Autumn.

Stocks

The US stock market continues to benefit from the pro-business combination of Trump in the White House and the GOP in control of Congress and the Senate. The S&P 500 Index traded to new highs, closing the month at 2,362.75 off a high of 2,370.75 on the pen-ultimate day of trading. The VIX Index (a measure of the volatility of the S&P) is, unsurprisingly, at the lower end of its five year range at 12.2%. It makes sense to be cautious in this environment, the S&P index is up nearly 13% from its

pre-election lows. Option strategies may offer good value at these levels.

The Nikkei 225 remains range-bound. PM Abe’s meeting with the US President was supportive. From a technical perspective the market needs to close above 20,950 in order to have broken-out. The index traded in a 3.7% range last month, closing at 19,119.

The EuroStoxx 50 looks more constructive from a technical perspective. It broke out of its recent range to the upside making a high at 3,355 on 22nd and closing near this level at 3,320. Election fever will dictate the next few months, beginning with the Netherlands on 15th March, followed by France on the 7th May and culminating in German elections on 24th September. The index may have broken out, but it’s difficult to imagine it surging ahead with so much political uncertainty hanging over the markets.

Bonds

US 10yr bonds, which have seen a substantial increase in yields since November, stabilised and then turned lower over the last few weeks. February was a month of consolidation. The highest yield was seen on 15th at 2.47%, by 24th it had fallen to 2.31%. It closed the month at 2.42%. This is still 90bps above pre-election levels and the prospect of a further rate increase from the Federal Reserve may see yields rise again soon.

German 10yr bunds marched to a different tune. After opening the month by testing their highs at 0.48% they had plunged to 0.18% by 24th, closing at 0.21%. Domestic politics will dominate European bond markets until the German elections in September. For the moment, fears about higher yielding Italian BTPs seem to have subsided. The spread between 10yr BTPs and Bonos, which we discussed last month, narrowed from 66bp to 37bp. This might just be that buying opportunity. Picking up Bonos at 37bp over Italy does not encumber one with a great deal of negative carry. The spread may narrow further, so average in.

10yr Gilts rallied throughout the month. From an opening at 1.47%, yields declined, to test 1.07% on 24th. These yields are the lowest since October and have seen a full retracement of the Trump related yield increase. 10yr JGBs remain trapped in a policy induced coma, although a spike to 0.155% was seen in the morning session on the 3rd. They then followed the lead of Germany and the UK, closing on their lows at 0.05%.

Commodities

Gold ended February just off its highs at $1,253/oz. The previous day’s high of $1,263/oz has reversed the majority of the Trump related decline witnessed since November.

Copper enjoyed another firm start to the month. It traded $2,82/lb on 13th and ended the month at $2.70/lb, holding on to four months of price increases. Signs of stronger demand from China keeps a bid under the market.

The oil market also performed well, with WTI reaching $54.94/bbl on 23rd, however the Baker Hughes Rig Count continues to rise in response – up 36 since 27th January to reach 602 on 24th February. Further upside in oil prices may be achievable but price momentum begins to slacken, barring a significant increase in demand, it is unlikely prices will get much above $60/bbl.

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