Global Daily – Regaining some poise

by: Georgette Boele , Nick Kounis

140128-Global-Daily-Insight.pdf ()
  • Investor sentiment showed signs of stabilisation after Friday’s jitters
  • German Ifo suggests economy will accelerate in the first quarter of this year
  • ECB policymakers signal that action is not imminent

After a weak start, sentiment recovered somewhat

At the start of the week, the sell-off in emerging market currencies continued and equities in Asia fell under heavy pressure. At some point during European morning trade, the Turkish lira dropped to 2.39 versus the US dollar (or -1%). Other emerging market currencies such as the South African rand, the Mexican peso, the Russian Rouble, the Brazilian real and the Indian rupee also posted large losses. However, afterwards sentiment improved and most of these currencies recovered. The recovery of the Turkish lira (TRY) was the most remarkable. After losing more than 1% earlier in the day, it recovered by almost 1%. The main reason behind this amazing recovery was speculation that the Central Bank of the Republic of Turkey (CBRT) will raise interest rates at a surprise meeting today. If action falls short of expectations, USD/TRY will likely rise above 2.40 today. With sentiment in financial markets recovering somewhat, the Japanese yen and the Swiss franc gave back some of their recent gains. Moreover, yields on 10-year US Treasuries and German Bunds edged up, while US equities were flattish. After the sharp increase in the equity volatility index or VIX last week, volatility closed lower on Monday. Gold prices also fell under pressure on the improvement in investor appetite. We expect sentiment to further calm this week as investors wait for the next big event: the FOMC meeting.

German economy to accelerate in the first quarter

Germany’s Ifo business climate indicator increased from 109.5 in December to 110.6 in January, recording the highest level since July 2011. The rise in the headline index mainly resulted from a jump in the expectations component (from 107.4 to 108.9), with the current conditions rising more moderately (from 111.6 to 112.4). The expectations component is the best tracker of GDP growth in this survey and at its current level it signals growth accelerating in the first quarter of this year. This is also in line with the results of the PMI survey that was published last week. Indeed, we expect GDP growth to pick up to around 0.6% qoq in 2014Q1 from an estimated 0.4% in 2013Q4, although the jump in the Ifo and the PMI suggests that the risks to our forecast are tilted to the upside. In any case, the German economy should outperform the eurozone considerably. The details of the Ifo report indicate that the pick-up in growth will mainly be in manufacturing and construction, while the retail sector will probably be less buoyant and roughly stabilise. That said, we expect retail sales and private consumption to grow robustly during this year as a whole, as household disposable income is being fuelled by growth in employment and real wages, while consumer confidence has risen to levels well above its long-term average.


ECB policymakers suggest action is not imminent

ECB officials signalled that the central bank is currently not minded to take new policy easing measures over the weekend, although it remains ready to do so if needed. The head of the Dutch central bank, Klaas Knot, said that officials would first need to understand the drivers of the recent ‘volatility’ in interbank rates before policy action. In terms of inflationary risks he judged that an ‘adverse shock’ would be needed for further action to be taken. Meanwhile, ECB President Mario Draghi hit the headlines yesterday with suggestions that he was considering an ABS purchase programme to fight deflation. Unfortunately, a closer reading of his words suggests that this is very much in the ‘development phase’ as an option that could be considered. Indeed, he even suggests that a market for simply packaged ABS would have to first emerge. Our sense is that if deflationary risks really did rise, a government bond buying programme would be the logical step. Overall, it seems like policy action at the February Governing Council meeting is less likely, though a move in March is still a real possibility.