It’s just over a week since the U.S. Federal Reserve formally paused its rate-rise campaign but central bankers around the world are falling over themselves to emulate Jerome Powell’s dovish turn. Australia’s Philip Lowe, having said for a year the next rate move was up, suddenly declared rates could go either way. The European Central Bank can hardly cut its minus 0.40% rate but a new round of bank funding stimulus is now widely expected.
The rate cycle has turned across emerging markets too — India has cut rates for the first time in 18 months; several others, including Brazil have hinted at cuts ahead. And upcoming central bank meetings in New Zealand and Sweden are sure to highlight growth concerns.
The shift is showing up on currency markets. The dollar fell in December and January as the Fed pause was priced in. Now it’s everyone else’s turn: the Aussie has lost more than 2% since Mr. Lowe’s February 6 comments; the euro has had its biggest weekly drop in four months and MSCI’s emerging currency index is retreating after rising three months straight.
If everyone joins the Fed in the doves camp, the greenback, with the highest interest rates in the G10 group, may resume its ascent. Analysts reckon it has stalled but only time will tell.
Brexit, pound sterling
Less than 50 days before Britain’s EU departure date, markets’ conviction that a no-deal Brexit will be avoided may be starting to fade.
There is not that much Prime Minister Theresa May can update U.K. lawmakers on when she addresses them on February 13. This will be followed by debate in Parliament where lawmakers can propose changes, known as amendments.
There are signs that going into that session, currency traders are ramping up their cautious bets on the pound.
Shorter-dated risk reversals, ratios of calls to puts on the pound, indicate investors are now more inclined to buy options to protect against a deeper fall in the pound versus the dollar, rather than anticipate big gains.
The pound has fallen back below a key technical market level — the 200-day moving average, an indication investors are no longer bullish on the currency’s prospects.
Happy new year?
As Chinese markets reopen after the lunar new year, they may get more hard evidence on the damage done by the Sino-U.S. trade war.
If March 1 passes without a trade agreement with Washington, Chinese exports to the United States will be subject to additional tariffs.
So, hopes are pinned on the U.S. trade delegation which travels to Beijing on Monday, led by Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. But President Donald Trump has somewhat dampened hopes of a breakthrough, saying he had no plans to meet Chinese President Xi Jinping in the coming month.
If talks collapse and tariffs increase on March 2, it will spell more pain for China’s economy — and the rest of the world. In turn, it will increase pressure on Chinese policymakers to ramp up stimulus at next month’s Parliamentary summit.
Headed for recession?
For months, the question on a lot of people’s lips has been whether the U.S. economy is headed for recession, but it looks like the euro zone could get there first.
The European Commission shocked markets by slashing growth and inflation forecasts for the bloc.
Evidence is already piling up that Germany, the bloc’s largest economy, was teetering on the brink of recession towards the end of 2018 due to global trade headwinds and a cooling Chinese economy.
Clouds are gathering on the horizon for the world’s top economy — global growth headwinds and the trade war are taking a toll while another government shutdown may be lurking around the corner.
Markets will be scouring various U.S. consumer and producer inflation data out in the coming days to see just how accommodative the Federal Reserve can be after chairman Jerome Powell said in January the case for raising rates had ”weakened.”
