The Weekly Wrap – Brexit, the FED and Economic Data Drove the Majors

While a Brexit extension cut the Pound’s losses for the week, risk aversion and a yield curve inversion drove demand for the Greenback and the Yen.
Bob Mason
Arms trade business concept.

The Stats

It was another big week in the global financial markets. The Dollar managed to recover some of the previous week’s losses as risk aversion hit the markets at the end of the week.

The economic calendar was on the busier side, providing direction through the week.

Of a total 62 stats monitored through the week, 26 came in below market forecasts, with 24 coming ahead of forecasts.

In spite of the relatively balanced week, it wasn’t all plain sailing. Economic data out of the Eurozone and the U.S on Friday rattled the markets.

Out of the U.S,

On the data front, key stats were balanced, with private sector PMI numbers reflecting slower growth. In contrast, the Philly FED manufacturing Index reported a marked rebound in March, with housing sector data also on the bounce.

Mortgage rates have been on the slide since last November. With house prices also seeing a pullback, buying activity certainly picked up. Existing home sales jumped by 11.8% in February and that’s before the peak buying period in spring.

It ultimately boiled down to the U.S Services PMI number on Friday, which fell from 56.0 to 54.8 in March.

Service sector activity eased to a 2-month low, according to the prelim Markit PMI report. While still holding well above the 50.0 mark, a weaker increase in new work and the smallest increase in employment since May-17 was a concern. The U.S manufacturing PMI didn’t help, falling from 53 to 52.5, which was a 21-month low.

The PMI numbers came in the wake of Wednesday’s FOMC interest rate decision and release of the economic projections.

A more dovish than anticipated FED led to a 0.65% slide in the Dollar Spot Index on Wednesday. Sliding Treasury yields through the 2nd half of the week weighed heavily on bank stocks and ultimately the U.S majors.

There’s been much talk of yield curve inversions and the market’s fears were realized on Friday. 10-year Treasury yields fell below 3-month Treasury yields, leading to fears of an imminent recession and the sell-off.

Risk aversion reversed the Dollar’s losses from Wednesday to leave the Dollar Spot Index up by 0.06% for the week.

In the equity markets, the Dow saw its biggest daily slide since January, falling by-1.77% to end the week down 1.34%. Things were far worse for the S&P500 and NASDAQ on the day, the pair falling by 1.9% and 2.5% respectively. For the week, the losses were less severe however, the pair down by 0.77% and 0.6% respectively.

Out of the UK,

A busy economic calendar provided little direction for the Pound, which remained under the influence of Brexit.

On the data front, the unemployment rate fell to 3.9%, while the annual rate of inflation picked up to 1.9%. Retail sales also rose in February, following a bounce in January.

On the negative side, claimant counts rose by more than had been expected, with wage growth also easing in January.

Outside of the data, the Bank of England delivered its March monetary policy decision, which provided few surprises. Uncertainty over Brexit continued to leave the Bank in a holding pattern.

The Pound fell by 0.61% in the week, despite the stats being skewed to the positive. It could have been far worse had it not been for a 0.78% rally on Friday.

On the Brexit front, the EU approved an extension to Article 50 until 22nd May. The extension gives Parliament one last vote on Theresa May’s Brexit deal in the week ahead.

Chances of a “no-deal” departure from the EU remain in spite of Friday’s rally, which came off the back of the EU’s extension.

In spite of the Pound’s slide in the week, the FTSE100 tumbled by 2.01% on Friday to end the week down 0.29%.

Mining stocks were amongst the biggest losers on Friday. Fears over growth and the Pound’s Friday bounce hit the sector hard on the day.

Out of the Eurozone,

It was another bad week on the data front.

The Eurozone’s trade surplus narrowed from €17bn to just 1.5bn in January. Reflecting weakening demand for European goods in January, it was all eyes on the private sector PMI numbers on Friday.

France saw both the manufacturing and service sectors contract in March, according to the latest survey.

Of greatest impact was Germany’s manufacturing sector PMI, which tumbled from 47.6 to 44.7. Manufacturing output fell at the sharpest pace since Aug-12. Factory orders fell by the largest amount since Apr-09, the height of the global financial crisis.

The contraction in both Germany and France’s manufacturing sectors led to the Eurozone’s manufacturing PMI fall from 49.3 to 47.6. The only positive was a continued expansion in the services sector. It’s of little comfort, however, when considering the manufacturing sector’s contribution to the Eurozone economy.

For the week, the EUR was down 0.21%. Market risk aversion on Friday led to a 0.63% slide on the day to pull the EUR into the red for the week.

The pullback in the EUR provided little support to the European majors. The DAX and the CAC ended the week down by 2.75% and 2.5% respectively. Friday’s PMI numbers contributed to the sell-off, with the DAX down 1.61% on the day, while the CAC slid by 2.03%.

Elsewhere,

A slide in crude oil prices on Friday contributed to a 0.7% fall in the Loonie through the week. Risk sentiment coupled with the Bank of Canada’s dovish outlook dragged the Loonie back to C$1.34 levels against the Greenback.

The Japanese Yen gained 1.4% to end the week at ¥109.92 against the greenback. Risk sentiment provided the Yen with support late in the week, while a dovish FED pinned back the Dollar mid-week.

For the Aussie Dollar and Kiwi Dollar, it was a mixed week. In spite of a dovish FED, Friday’s market sell-off led the Aussie Dollar to a 0.41% fall to end the week down 0.03%.

The Kiwi Dollar managed to avoid a sell-off on Friday to end the week up 0.48%. Support for the Kiwi Dollar continued to come off the back of the RBNZ’s more hawkish outlook on growth. 4th quarter GDP numbers out of New Zealand on Friday reflected a pickup in growth, supporting the RBNZ’s outlook.

It wasn’t so rosy for the Aussie Dollar. The RBA meeting minutes affirmed that the chances of a rate hike or cut remain finely balanced. House prices are on the slide, household debt remains elevated and wage growth remains tepid. It’s a bad combination for the economy, which needs the support of household consumption.

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