The stage is clearly set for dollar strength to continue. In the FT this morning I see articles about the United States becoming the largest petroleum producer, surpassing Saudi Arabia (no need to worry about trade deficits then!), intervention in New Zealand to weaken the currency, and reports about Emerging currency woes. All of these items support the strong dollar thesis, as does the weakness of commodity prices.
In previous blogs, I’ve opined about the expensiveness of equity and bond valuations, well… if there’s one thing that can help justify those valuations, it’s cheaper commodities. Cheaper commodities imply a lessening of the inflation threat which is good for bonds. It also implies cheaper raw materials – good for corporate earnings, and higher disposable income – again good for corporate earnings. Perhaps we need not concern ourselves quite so much in the short term about valuations. Perhaps…
Some big things to look forward to this week. As was mentioned yesterday, Non-farm payrolls is published at the end of the week. As ever the state of employment and wage growth remains key in determining the direction of Federal Reserve policy. The other big thing, potentially even bigger actually, is that we’ll find out more about the ECB’s asset purchase plan on Thursday. The great and the good of Eurozone central banking will be in Naples on that day and we will be given an insight into how the ECB will further its plan to expand their balance sheet by 50%, from 2trn to 3trn. We mention numbers like those these days and I bet none of us even blink! Truly amazing. But.. and here’s the thing.. the market for asset backed securities and covered bonds is not that deep in Europe. I very much doubt the ECB can buy enough of the stuff to even get half of their balance sheet expansion done, and certainly not with the backing of the rich EU governments. Quite a quandary they’re in!
Concerns about the outcome of the ECB’s meeting, may slow the euro’s seemingly inevitable decline this week, but as to the long term, I see nothing stopping such a powerful trend. When you have rationalisations for both sides of the ledger – weaker euro, stronger dollar – it’s hard and completely illogical to try to oppose the way of things.
Today we get employment data in the Eurozone, inflation numbers out of Italy, final GDP data in the UK, and house prices in the US. Risk sentiment appears to be positive this morning. We could be at levels where equities have found short term support, I wouldn’t be shocked if we attempt to rally today. Participants will have very obvious levels that will let them know if they’re on the wrong side of the floor.