Global markets recover but financial unknowns loom

Markets rebounded in February, erasing January's losses. But two major unknowns – the size of the US taper, and the global direction of prices – loom over March.

Global financial markets bounced back last month. The losses experienced in January were largely recovered. Improving risk sentiment took higher-yielding assets back to 2014 highs as the threat of a breach of the US debt ceiling passed as a non-event and growth data improved views of the global recovery.

With central bankers keeping the door open to loose monetary policy, markets took all asset classes higher against the US dollar. The euro gained 2.36 per cent against the dollar while the British pound appreciated 2 per cent.

Gold continued to shine amid increasing price pressure from around the globe and consolidated above US$1,250. Traditionally a hedge against inflation, gold has benefited as inflation data from around the world slowly begins to gain momentum.

While in the short term deflationary pressures seem to have ceased, the recent run of data suggests that in the long term, deflation still remains a key challenge for the euro zone.

The euro zone finds itself in a precarious scenario and remains the most sensitive of the developed economies: growth forecasts remain sluggish. Analysis from a recent European Commission study showed that growth in the euro area during 2014 would rise to 1.2 per cent – well below the US and China at 2.9 per cent and 7.4 per cent respectively.

Amid lagging growth, deflationary pressures and record unemployment, the ECB president, Mario Draghi, will continue to keep his options open to boost the recovery. If price pressures continue to wane, Mr Draghi might be forced to introduce another round of liquidity programmes which would involve the euro significantly depreciating against its major counterparts.

Although we don’t expect Mr Draghi to spring any major surprises at the ECB policy meeting this week, his views of the progress of the euro area will no doubt mean he maintains a largely loose and accommodative tone.

With the US debt ceiling vote passing in Congress, the focus and performance of US equity markets was driven by a mixed month of domestic growth-related data. Although retail sales, industrial and manufacturing production figures all factored in the negative, payrolls bounced back after a dismal January – albeit more slowly than expected.

But the best news of that report was the improvement in the unemployment rate, which fell to 6.6 per cent from 6.7 per cent, and this amid an increasing participation rate.

In her first testimony to Congress as the Fed chief, Janet Yellen, like her European counterparts, maintained her accommodative stance towards the ongoing taper. Although the data was mixed in February, we don’t foresee the picture to have changed too much and expect another $10 billion round cut when the Fed’s open market committee (FOMC) reconvenes.

By the time its two-day meeting kicks off on March 18, the FOMC will have an accurate gauge of the condition of the US labour market, with February payrolls due out at the end of this week. Expectations are for an addition of 150,000 in the payrolls with the unemployment rate expected to stand at 6.6 per cent. But if the past two reports are anything to go by, we could be in for some surprises. With weather patterns affecting industrial, manufacturing and retail numbers, this kind of drag could slow down the jobs growth in February’s report, which would then risk a further taper.

And finally, all eyes will be on Ukraine. Threats of escalation are an unfortunate possibility, and equity markets will remain sensitive in the week ahead. Gold will thrive amid the tension, benefiting from its safe haven status and finding a new range of consolidation between $1,320 and $1,380, with a test of $1,430 on the cards if the threat of violence increases.

Gaurav Kashyap is the head of futures at Alpari ME

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