Head of FX Strategy
Summary: The market trying to get off to a positive start for the week, but concerns remain on the pace of a Covid19 recovery on the other side of the likely imminent peak in the outbreak in the major DM economies. Focus this week on the Eurgroup meeting of finance ministers tomorrow, whether oil can put together a rally, and still fragile EM situation.
Please have a listen to today’s Saxo Market Call podcast – especially useful today for the discussion onoil market dynamics and the difficulty of engineering a sufficiently large production cut to get ahead of the risk for further price declines in the near term.
Covid19 headlines the driver? – many are attributing the strong surge in risk sentiment overnight to the prospects for an imminent peak in Covid19 impact that may prove lower in the US case than many feared recently. US President Trump and Vice President Pence both touting a stabilization narrative overnight. The numbers are already turning in many places in Europe, with the UK and Sweden as the two main spots of concern . Still, no one can tell us how quickly activity can resume as even places like Denmark that will try to roll out an “opening up” programme starting next week will start with baby steps and the damage done in terms of labor market losses will weigh on behavior as well as policy caution on resuming normal activities, large events, etc.
Tomorrow an important test for EUR – the next key test for fiscal solidarity across the EU is the Eurogroup meeting (of EU finance ministers) tomorrow. Yes, the ECB is keeping things orderly by having already abandoned former rules limiting its ability to buy peripheral debt more aggressively and keeping spreads down (just weeks after Lagarde said it wasn’t her job!)Things can go very wrong for all thing euro if we see anything resembling the prior meeting - i.e., a total failure to come to an agreement on any level. The stakes are high for Europe here.
EM strains worsened – some of the major EM currencies suffered weak sessions on Friday and were weaker still overnight before finally bouncing in line with the broader surge in risk sentiment overnight. We continue to keep an eye on EM after somewhat disorderly declines last week and the risk of a credit even setting off wider contagion. Emerging market policymakers do not have the same policy options as elsewhere as many have too much aggregate debt denominated in foreign currency – even if large portions of that debt is in the hands of corporations rather than the sovereign itself. Focus on South Africa and Turkey as the weakest links, but Mexico and Brazil also deserve attention.
Chart: EURJPY
We will continue to watch the cycle lows in EURJPY and EURUSD in coming sessions over the Eurogroup meeting tomorrow and the general sense of whether the EU is pulling together or spinning apart politically. Already, the rally overnight has been significantly backtracked as of this writing – watching the 116.00-25 area closely from here.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
