Euro sharply lower on ECB plans to frontload QE

The resilience of euro confounded the previous prevalent ‘buy dollar sell euro’ theme. This is not to mention that quite a number of investors who ramped up short euro bets was punished heavily by euro’s refusal to drop to parity.

Euro and U.S. dollar notes are arranged in this studio photo taken in London
Source: Bloomberg

 On Tuesday, EUR/USD dived below 1.12 as dovish comments from ECB hit the wires.

ECB Board member Benoit Coeure said the central bank plans to front-load its asset purchases in May and June, due to an anticipated lull in liquidity during summer.

Although he added that the frontloading may be offset by back-loading in September when liquidity improves, this was largely ignored by the market.

EUR/USD slide saw the dollar index rally towards 95.0.However, this drop is unlikely to see euro parity chants as the market has probably learnt its lesson.

Nevertheless, the sharp move lower in euro exacerbated the already cautious market sentiments in the event-packed week where the limelight is firmly on the FOMC minutes.

Cautious Asia but Chinese shares rebound

The Asian equity space probably shows a more accurate picture of the underlying market caution ahead of key event risks. We have seen an uneven performance across Asia with a strong rebound in Chinese equities.

The China A50 and CSI 300 posted solid gains today, snapping two sessions of losses. However, as a whole, the Chinese stock market remains in a broader consolidation mode, except bullish Shenzhen equities.

Part of the reason for the wider fluctuations seen in Chinese stocks is due to the heavy involvement from retail investors, which tend to be more susceptible to a herd mentality. Retail investors account for around 80% of the trading volume in Shanghai.

The opening up of China’s capital account through initiatives such as the Shanghai-Hong Kong stock connect, this will eventually bring more stability to risk assets as the proportion of institutional investors increases. Hong Kong shares also benefited from the recovery in H-shares which jumped over 2%.

Nikkei looking up

Record profits and stronger earnings outlooks brought investors back into Japanese equities. The Nikkei 225 advanced past key 20,000 and held on to gains on Tuesday. Japanese firms were more optimistic on profit projections for this year, especially export-oriented companies. A weaker yen was partly responsible for boosting the earnings of big exporters.

Additionally, share buybacks and higher dividends also bolstered investor confidence. Dividend payout was raised to a record of ¥9 trillion in the last financial year. However, domestic demand in Japan remained soft, as consumers were hit by a sales tax hike, lower real wages, and higher prices.

Lower household spending may be the chief reason holding back economic growth and we could see that in the preliminary Q1 GDP due tomorrow. Retail and services companies may be most affected if persistent belt tightening depresses revenues.

STI still stuck in a limbo

The benchmark index continued to languish in a tight band amid subdued liquidity. As of 4.36pm Singapore time, STI clung on to the 3450 mark, with volume of 1.6 billion units worth SGD798.2 million. A strong open in Europe was unable to attract investor interest.

Genting remained under pressure as Macquarie maintained the ‘underperform’ rating on the share and lowered the 12-month price target to 75 SGD cents from 80. With the Genting Singapore’s management not expecting the premium gaming volume to pick up in the near future, profits are likely to fall this year. Macquarie estimates put full-year VIP volume at SGD 50 billion, which is a 35% year-on-year decline.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.