I
expect that this trade fight will be messy and cause more volatility in
equities, fixed income and currency markets in the short run. However, I believe this may end up with the
E.U. and China taking a less protectionist stance, rather than the U.S. taking
a stronger one. After all, there is no winner from a trade war in the long
term, and policymakers know that very well. Until this scenario fully plays
out, I expect to see a further selloff in equities and even fixed income markets,
with the primary beneficiaries being the Japanese Yen and gold.
The
Euro found no support after Germany’s Social Democratic party voted for a
coalition deal with Angela Merkel’s CDU party. The muted Euro reaction is
mainly due to worries that the Italian elections delivered a hung parliament.
The European Union would have a new headache to deal with if Italy formed a
Eurosceptic coalition which would undoubtedly challenge E.U. budget rules.
Expect to see a sharp fall in Italian equities today.
On the
data front, eurozone services PMIs are likely to show a little bit of a
slowdown later today, similar to what we saw in the manufacturing sector last
week, but the figures are unlikely to have a significant impact on the Euro. Investors
have lot of news to digest this week.
Monetary policy
meetings
The
European Central Bank meeting on Wednesday is not expected to result in any
change to the asset purchase program or interest rates. Traders will be
focusing mainly on the language of the statement, particularly on any changes
in the forward guidance. Given the strong performance in the Eurozone’s
economic recovery, many investors are waiting for signals for when the ECB will
quit buying bonds. At this stage I think no clear signal will be given. However,
the potential of upscaling of QE is likely to be removed from the statement.
Thus, the meeting is likely to be slightly positive for the EUR.
Bank
of Canada and Reserve Bank of Australia are also meeting this week. Given the
slight slowdown in recent economic data, I expect both central banks to keep
policy unchanged and the meetings are likely to be a non-event for currency
traders.
U.S. Jobs Report
Traders
will closely watch the U.S. non-farm payrolls reports. Although hiring is
expected to have picked up slightly in February and employment to remain at
4.1%, both these figures will be ignored. Investors are mainly concerned about
the average hourly earnings figure. After increasing at the fastest pace in
almost a decade, wage growth is expected to fall 0.4% YoY. If this
materializes, then previous inflation fears which caused the steep drop in
equities beginning of February, will likely ease.
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