Overview: The minutes from the Federal Reserve’s last meeting revealed that policy makers will err on the side of caution and therefore likely keep interest rates low for an extended period. To avoid undoing a recovery that has taken..
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years to gain traction, the Fed will likely keep rates low even after unemployment and inflation rates have normalised. The news forced the US dollar lower and temporarily pushed broad US equity indices higher before global equity benchmarks slumped toward the end of the week. Precious metals generally trended higher with the US dollar weakening and on-going mining strikes keeping platinum supply tight. Industrial metals remained buoyant amid an improving global economic outlook.
Commodities: Coffee price stretched. Arabica coffee surged 18% last week as the National Coffee Council forecasted the lowest crop output in Brazil in five years due to drought-related damage to coffee bushes in Minas Gerais, Brazil. However, we think that coffee prices are overstretched given ample inventories. According to Somar Meteorologia, Belo Horizonte in Minas Gerais received more than double of its normal monthly rain in just the first four days of the month. Colombia reported that its coffee production in March was up 34% over the previous year and exports were up 37% over the same period. Nickel rose 5.6% amid tightening supply. Indonesia’s ban on nickel ore exports is biting into China’s production of nickel pig iron, despite stockpiles of the ore having ben accumulated over the past year. Consensus estimates point to only 6-8 months of ore inventory left in China. Wheat fell 2.1% after a bearish USDA WASDE report highlighted increasing inventory and global supplies.
Equities: Goldminers surge as global equity benchmarks plunge. Sharp corrections on European equity benchmarks last week were triggered by a plunge in US equity market, as investors fretted over US corporate earnings and elevated valuations. The FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index rose 5.1% and 3.5% respectively while the Russell 2000® Index declined by 4.5%. Meanwhile, gold miners bucked the trend, rising 3.6% as gold rebounded 2.8% and investors looked for more defensive equity market exposures. With most European benchmarks reaching record highs this year, investors need confidence of solid fundamentals to support equity valuations and sustain upward momentum. Accordingly, US earnings reports and economic data releases will be critical for near-term sentiment, with any disappointment likely to weigh heavily on global equities.
Currencies: Monetary policy surprise sees US Dollar hit five month lows as global inflation moves into focus. The more dovish Fed stance outlined in the minutes of its latest meeting surprised investors and saw the US Dollar drop as expectations for higher rates were pushed back. We expect the USD to recover, particularly against the Euro and Japanese Yen, as investors look at the continued underlying strength of the US economy. To the extent that deflationary pressures continue to threaten the Eurozone, rising expectations of more action from the European Central Bank should force the Euro lower. Currently medium term inflationary expectations for the Eurozone are around 2%, but could move quickly lower if this week’s CPI data disappoints. ECB President Draghi recently stated the need for further stimulus if the Euro remains strong. While the Bank of Japan failed to provide more stimulus last week, consensus forecasts centre on further monetary easing prior to end-Q2 and this week’s industrial production data will be central to that end and a weaker Yen.
Source: ETFWorld.it
