The beginning of the week saw a sharp deterioration in sentiment as yields in span Italy surged and equities sold off sharply. However since then financial markets have gone into a correction phase and we've seen general positive risk appetite. Sentiment has been buoyed by comments from central bank officials from around the globe.
ECB Helps Calm European Periphery Sovereign Bond Markets
In the European Wednesday session we had ECB executive board member Coeure say that the central bank was ready and willing to start up its bond purchase program in order to bring down Spanish yields.
According to him, the jump in yields was exaggerated and Spain just needs time to put it place its austerity measures and economic reforms.
Since these comments the European sovereign bond market saw pressures ease, despite even a lackluster Italian auction on Wednesday.
FOMC's Yellen Sticks to Accommodative Stance, Dudley Reaffirms 2014 Low Rates Pledge
In Wednesday's NY afternoon the Fed's Beige Book gave a generally positive assessment of the US economy with manufacturing, hiring, and retail sales showing some signs of strength in the previous month.
At the same time Janet Yellen, who is the vice chairman of the Federal Reserve, said that she considers a highly accommodative policy stance appropriate in present circumstances and that over the next several years, I anticipate that we will fall far short of achieving our maximum employment objective while inflation will remain subdued.
That along with comments today from New York Fed Pres. William Dudley that he hasn't seen anything in the data to suggest that the Fed should change its pledge to keep interest rates low through 2014 has given the market the sense that the Federal Reserve will continue to keep the wind behind the sails of equity markets boosting sentiment.
From Reuters: An influential voting member of the U.S. central bank's monetary policy committee, Dudley appeared to leave the door open to additional stimulus measures as he noted that the economic data also looked brighter at this point in 2010 and again in 2011, only to fade later in those years.
In the headwinds department, I would include the run-up in gasoline prices because that will sap purchasing power, the continued impediments to a strong recovery from ongoing weakness in the housing sector, and fiscal drag at the federal and state and local levels.
Downside risks, he added, include the possibility of disappointing economic growth overseas and higher oil prices.
BOJ Shirakawa Talks Powering Easing Measures, Chinese Loan Data Supports Looser Chinese Stance
In Japan meanwhile the Bank of Japan Gov. Shirakawa said that the BOJ will take powerful easing measures to combat deflation - which could be interpreted as a signal of a further increases in the central bank's bond purchase program in the upcoming meeting.
That should help knock down that JPY and also likely help sentiment as it means more liquidity from monetary authorities.
In China meanwhile some of the behind-the-scenes moves by the central bank there as well as cuts to the reserve ratio requirement recently have succeeded as loans grew at a stronger-than-expected pace and money supply growth also quickened.
From Bloomberg: Local-currency-denominated loans were 1.01 trillion yuan ($160.1 billion) in March, the People's Bank of China said today, exceeding all 28 estimates in a Bloomberg News survey. M2, the broadest measure of money supply, grew 13.4 percent from a year earlier. China's foreign-exchange reserves, the world's largest, rose to a record $3.31 trillion as of March 31 after dropping for the first time in more than a decade in the fourth quarter.
The report may reassure investors that the nation will avoid a deeper slowdown in economic growth. Government data due tomorrow are set to show gross domestic product probably expanded 8.4 percent in the three months ended March 31, the least in 11 quarters.
Is This It For Correction to Equities?
Combining all of these factors together we have financial markets stabilizing and global equities recouping some of their losses from earlier in the week and there has not been a flight of capital from carry trade positions. The general mood in sentiment undermines the USD, even as data today showed jobless claims climbing higher than expected which could have been interpreted as a negative (though part of the blame likely lies with the Easter holiday).
The next key risk event will be Chinese GDP, as well as industrial production retail sales data, set for release in upcoming Asian trading session. If the data comes in better-than-expected in can add to other positive macro data from the middle of the week including a better-than-expected employment report from Australia, the Chinese loans data, some positive manufacturing and money supply figures from Japan, and a smaller trade deficit in the US which should help boost GDP estimates for the US in the 1Q.
Could then the 65 point drop in the S&P500 from its highs in late March to the lows seen on Tuesday be it in terms of a correction to the 4-month run-up in US equites? If we head higher we will have an important test at 1377, a level which has switched its role from resistance, to support, and now will be tested as resistance again. Whether we move higher through there will determine if we have a continuation of the risk-on theme that has been cultivated by the central bank comments from this week.
We will go over all the key developments and themes from this week in our Friday Market Intelligence Briefing which is open to the general public.
Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.