The Risk Still Looms

Last week- Although the stream of economic data was mixed the positive sentiment remained elevated during the week. In the EU retail Sales surprised for the worst and the GDP stud at -1.5% YoY in line with expectations. The trade balance in the US and Japan surprised for the better and sentiment was positive. In the UK the goods trade balance was worse than market previously expected. Unemployment in Canada remained unchanged initial jobless claims was slightly positive and the Swiss Job market continued to show contraction. 

The Reserve Bank of Australia lowered the Australian key rate to 3% from 3.25% amid fears for growth prospects in the Australian economy. In his speech to the press Glenn Stevens the governor of the RBA stated that contraction in the global economy has continued during the few months of the year and the near term outlook for the world economy is further marked down. The governor also remarked in his speech that the effects of the stimulus programs around the world is not yet visible and there are some signs of stabilization but it is difficult to conclude how sustainable are they. The Australian unemployment rate published later in the week which stud at 5.7% an 18 year record only emphasized the RBA decision to cut the key rate as more then appropriate.

 In the BOJ Meeting in Friday the discussion focused mostly on the central banks intention to increase its purchases of Japanese government bonds. The BOJ board decided unanimously at the meeting to increase its purchases of government bonds from ¥400 billion a month to ¥1.8 trillion a month. The decision exceeded the market consensus of an increase between ¥100-200 billion. The Key rate was left unchanged at 0.10%.  

 The publication of the FOMC minutes this week, tagged market credit conditions as “very tight” and the financial markets were manifested as fragile and unsettled as pressure on the system was intensifying. Banks still mostly avoided opening credit lines as they attempt to increase their reserves ratios amid rising defaults and falling earnings. It was evident the potential for another cycle of panicked invertors and massive risk aversion is still a looming threat. The so called ’stress test’ attracts market attention as one of the potential triggers that could spark such a negative shift in sentiment and a massive risk aversion. In the ’stress test’ the US federal government has performed a stress test on the 19 US largest banks  which will disclose wither the banks can withstand their liabilities while maintaining adequate capital ratios.

 In conclusion the week ended with a positive sentiment. Nevertheless the risk for a renewed negative cycle is still lurking around the corner. Equities gained strongly but so did the Greenback and although investors notion that the US might recover sooner than other economies had a rule in the dollar latest rally it is also hard to ignore the Greenback’s status as a safe haven and a risk trade. As equities gained so did the Dollar hence more risk aversion is taking place. As economic stability is yet uncertain the risk still looms.

 The week ahead- Market eyes will be mainly focused on the earning season as investors try to conclude what is the outlook for corporations and their growth. The earnings releases are most likely to affect risk aversion trading. A scenario where earnings releases are worse than expected will reduce invertors’ optimism and appetite for risk. As the market is in a bullish rally for several weeks while fundamentals are still unstable, sentiment is likely to be fragile.

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