Europe
A surprise announcement from the European Central Bank that it will front load its asset purchases into the spring to avoid the ‘summer lull’ sent the euro sharply lower and export-sensitive European stocks flying higher.
Benoit Coeure, the Vice President of the ECB announced the central bank intends to increase its asset purchases in May and June for seasonal liquidity reasons. It’s likely not a coincidence that the ECB is upping the ante on its bond-buying following a major bond-market sell-off especially with Greece’s debt negotiations going to the wire.
German investor confidence slumped more than expected in May according to ZEW surveys following a rout in German stocks and bonds in the past two weeks. In a symptomatic upside down market reaction to a drop in German investor confidence, German stocks jumped almost 2% on the day. The logic being that a drop in German investor confidence sends the euro lower and improves export revenues.
The picture of central bank policy divergence was muddied further on Tuesday with EU inflation missing expectations and the UK seeing deflation for the first time since the 1960s.
The correction in the US dollar that had been boosting commodities and major currencies was in part on the idea that the Fed may not be as quick to hike rates given recent weak US data. The inflation today shows that while the Fed may be slow to hike rates, Europe and the UK will still be a lot slower. If the US dollar rally picks up pace again, the outlook for US stocks is less certain but Eurozone stocks could be off to the races.
The FTSE 100 held onto modest gains on the back of “good” deflation thanks to lower oil and food prices. Solid results from Land Securities helped property and house building stocks including Intu Properties and Taylor Wimpey (LONDON:TW) outperform. The carnage in metals prices meant mining companies were a drag.
US
US stock markets traded off record highs in early Tuesday trading as a stronger dollar, lower oil and weak corporate earnings blocked new highs.
Housing data was good with housing starts jumping to a seven year high and building permits higher.
Wal-Mart (NYSE:WMT) missed profit and sales estimates hurt by a stronger Dollar while same-store US sales rose for a second quarter but by slightly less than had been forecasted. Home Depot earnings topped expectations and the company raised forecasts but shares slipped after a strong lead into the results.
FX
The US dollar rocketed higher on Tuesday largely thanks to the surprise QE announcement from the ECB and weak European data. The correction in the dollar that has been taking place in the last month has now started to lose steam.
Lower than expected inflation in Europe couple with a surprisingly big dent to German investor confidence in May sent the euro nosediving. Having failed to breach 1.15, the peaks reached in February EURUSD has dropped over three big handles in the past two days.
Annual deflation for the first time on record send the British pound lower against the US dollar but it held firm against the euro. GBP/USD has now retraced half of its rally since May 5, hitting 1.55 which corresponds to the peak reached in April.
Commodities
It was a complete bloodbath for commodities on Tuesday thanks to a hefty rebound in the US dollar with silver down over 4%, copper and oil down over 2% and gold not far behind.
WTI crude oil has been trading in a range between $57 and $61 per barrel. The rally that began mid-March has stalled because now that US production has started to slow, the rate of decline in oil rigs has slowed. If oil prices hold gains, there’s a good chance some rigs will come back online and US production will increase again.
Having broken out of multi-month trading ranges, Gold and Silver are re-testing the breakout area as the dollar strengthens. The precious metals moved higher in spite of dollar strength on Monday so need to maintain current price levels (around $1,200 in gold and $17 in silver) to have any chance of sustaining recent upwards momentum.
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