Equity markets – relief at the end of the week?

Oil prices fell from nearly 120 USD per barrel of Brent yesterday in a morning (CET) to around 113 USD today (and even temporarily below 110 USD yesterday during the US trade) on rumors that Qaddafi might be losing grip on power and doesn’t control a substantial part of the country anymore. A decline in oil prices helped stem declines on major equity markets and offers a chance for a rebound at the end of the week. However, that might not be the end to this story. Even if the Libyan dictator is indeed on the way out, those replacing him (and according to rumors that might be al-Qaida, at least to some extent) might not be more cooperative with the outside world. Moreover, it is not certain that equities return to a rally mode even if the price of oil stabilizes. It is possible, that a kind of relief rise in equities might be just a subwave “b” in a larger “abc” corrective structure.

So far, the S&P500 futures have managed to defend a key support slightly below 1300 pts. (not without problems though). That may offer some room for an upside movement. Further declines (with a target of 1262 pts.) will be in a pipeline, should the index’ futures return below 1300 mark.

EURUSD – market discounting hikes, again

Many could have wondered why European currencies gained this week despite an evident rise in a risk aversion. The answer is: interest rates. Investors continue to increase their bets on the hikes in the euro zone with the markets seeing now at least two hikes this year and one already in the first half! An interesting point is that those bets were increased this week even as higher oil prices pose a threat to a recovery. However, investors might believe that the ECB will see costly oil mostly as a further inflation risk (and might be more inclined to push the interest rates pedal sooner) while the Fed might see it as a risk to a revival in employment (and delay any tightening). Thus the performance of the EURUSD.

The question is, however, if those expectations are not exaggerated? Interestingly, the newest consensus among global economist (gathered by Bloomberg) sees only one hike this year in the euro zone and only as late as fourth quarter. If they are right, market might receive another cold shower after the ECB’s conference next week.

So far, however, the pair is looking at a possibility of further rises. If the pair can breach the key resistance (’11 high) at 1,3860, a decline from early February could be seen as an “abc” correction with the pair running the third upside wave at the moment, with a possible expansion to 1,40. However, breaking 1,3860 is a key here.   

Events to watch – second GDP estimates in US and UK

Second estimates of the q4 GDP in US and UK are key figures for today. The US figure was broadly in line with expectations in the first release, however, a structure was surprisingly good (GDP rose by more than 3% despite a large negative contribution from inventories). The consensus doesn’t see a major revision today (3,3%, 8.30 ET, 14.30 CET).

UK’s release (4.30 ET, 10.30 CET) might be even more relevant. The first estimate (-0,5% q/q when a rise of 0,5% q/q was expected) delayed a rate hike talk but despite the data the MPC got more hawkish at the last meeting (with 3 out of 9 members calling for a hike). Should we see an upward revision today, odds of a sudden hike would be increased substantially and the GBPUSD might finally make it above the key 1,63.   

Przemysław Kwiecień PhD, Chief Economist

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