Fed sitting on the fence

Equities are unwinding across the globe as growth fears resurface following an alarming US Q1 GDP reading.

Source: Bloomberg

Some analysts have gone as far as saying the US recovery has ground to a halt after Q1 GDP growth came in at just 0.2% when the market was expecting 1%. With growth falling well short, investors looked towards the Fed meeting for any hints that this will take a June lift-off possibility completely off the table.

However, the Fed was very non-committal as officials still believe economic growth and inflation will rebound. The Fed acknowledged slower growth but felt this reflected transitory factors such as the unseasonably cold weather in the northeast, a stronger greenback and potentially weaker investment due to lower oil prices.

It even sounded cautious on the labour market, suggesting they will be accommodative for a while yet. This perhaps suggests the Fed will have to see how Q2 progresses before pulling the trigger on rates. This would imply the next meeting is highly unlikely to bring lift-off with a move later in the year, potentially September, being more likely.

USD long trade takes a hit

While equities in the US were not in as bad shape as we’ve seen in Europe and Asia, confidence certainly seems to have been shaken up, with a few unknowns impacting investors. An unwind of the greenback is perhaps what’s helping stem the bleeding in US equities for now, along with some reasonable earnings.

However, the reality is we saw an unprecedented QE programme by the US and, judging by the way data is going, the economy isn’t quite able to stand on its own two feet yet. The impact of the stronger USD has already been having an impact on some economic readings and could really turn the screws on earnings in Q2.

If we see sustained weakness in the greenback through Q2, trading strategies will be even trickier to navigate given most portfolios were positioned for a rising greenback this year. We’ve already seen the greenback lose ground to currencies such as the euro and AUD. This has played a big role in equities in Australia and Europe, showing the extent to which equities are becoming a derivative of currencies.

Banks weigh on the ASX 200

The ASX 200 slipped to its lowest since February, with AUD/USD still oscillating around $0.8000. Banks have led the falls while there has also been profit taking in some of the recently-outperforming miners like FMG. While the majority of economists still expect a rate cut next week, investor positioning certainly seems to be in favour of no change in rates.

The AUD is firmer and yield plays have been coming off. There also seems to be a sense that banks will not be announcing any hefty dividend payment hikes when they report. Greenback weakness is also impacting currency-sensitive stocks with the healthcare space having gone through some unwinding over the past week or so.

Europe recovery on the cards

Ahead of European trade, we are calling the major bourses firmer with equities recuperating some of yesterday’s sharp losses. A sharp rise in the euro saw the currency come within striking distance of €1.1200 against the greenback.

Sharp moves in German bunds played a role in euro price action. Bunds are considered a safe haven and, when they are sold off, this suggests risk is in play. The inverse relationship between the euro and European equities remained apparent as the DAX led the losses in Europe.

On the calendar we have a couple of CPI readings for Europe and a GDP reading for Spain. It’s another busy session in the US with unemployment claims, employment cost index, personal spending and personal income data all set to be released. This could cause further movement in the greenback.

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