Market analysis: Stalemate in trading with little room for manoeuvre

In April there was almost no net change across a broad range of dollar currency pairs including the euro, the Canadian dollar, the Australian dollar, Swiss franc, South African rand & Indian rupee. Even gold ended virtually unchanged – the markets were stalled.

The reasons for this economic lethargy are clear. We are faced with a market in which the major economies of the world – the US, China, Europe and Japan – have no room to manoeuvre. They have tried every option to stimulate their economies and the results have been just about positive.

In the euro zone investors have been concerned about the lack of European Central Bank reaction to very low inflation and the risk of deflation. In Japan the central bank has been unwilling to act pre-emptively to head off the effect of the increase in consumption tax.

In the US the Federal Reserve’s position is that it is ahead of the cycle and will continue to taper and eventually move towards interest rate increases. So monetary policy has not changed and there is no indication that any changes are forthcoming.

In the US this has created a market anomaly, breaking the negative correlation between bonds and equities that has prevailed for most of the past three decades. With US stocks near record highs and treasury bond yields near multi-month lows, the disconnect between equity and debt investors is clear. At the start of May yields on the US 10-year note hit a five-month low, falling 20 basis points from the high in April and they are already testing the year’s lows at 2.57 per cent.

Alongside these moves the 30-year note’s yield fell to a new low for the year. Bond investors are betting economic demand will remain tepid and that inflation will not materialise, as long as the Fed continues to taper. This view is at odds with the equity market which, with the S&P testing the 1,890 mark, is expecting and pricing in more growth.

There is a similar story in Europe. The euro is near the top of its one- month US$1.3800-1.3900 trading range and sentiment is gradually improving. Prices are above its 20-day moving average which has had a strong correlation with every rally and failure in the EUR-USD for the past 1.5 years and analysis points to the euro breaking higher. But European data is also mixed: 53 per cent of April’s figures for the euro zone were positive, 47 per cent negative. Inflation continues to fall but the ECB believes the slowdown is temporary and Mario Draghi, while ready to act if necessary, has no expectation the bank will need to. This position and rhetoric should support the euro, but at this stage there seems little to propel the market significantly higher.

If we are looking for a signal that a change is coming, gold is always a good barometer and reflects the sentiment of both institutions and retail investors. Throughout April dips below $1285.00 continued to attract buyers. Positive momentum increased, which signals buying is becoming stronger. But the fundamental picture is again mixed. Strong corporate earnings in the US and equity markets at their highs are countering investors’ interest in gold, as are low US inflation prospects. Stockpiles of gold in China, the world’s number one importer, remain high and with the yuan weakening and the economy slowing, there is unlikely to be any rise in demand.

This almost unique situation is rewriting trading strategies and theories. Everyone is waiting for something to give, for a breakout to take place. But at the moment it is difficult to see when and where this will come from.

Max Knudsen is the chief market strategist at ADS Securities

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