The opposing forces on equities

May 13, 2016

In the US at least, there are opposing forces on equities. Continued low interest rates and limited expectations of further tightening are offering support, but at the same time, some of the indicators on the economy have been softening of late. Furthermore, most economic surprise indices for the US (difference between expected and actual) have been falling of late, reflecting this run of disappointment. So do equities trade on the economy or the easy policy? In the early days of the crisis, it was always the latter than dominated. Now, it’s harder for that, not least because the marginal benefit from low rates has diminished rapidly. So it’s hard to see the policy outlook pushing equities substantially beyond the highs seen mid-April. Today, the retail sales numbers in the US will be in focus, perhaps more than usual given the weakness seen in the retail equities of late relative to the overall index.

In the FX world, we’re seeing the dollar firmer into the end of the week, with the Aussie taking it on the chin and back below the 0.73 level. Cable also touching the 1.44 level, with yesterday’s volatility in the wake of the BoE Inflation Report largely behind it. Meanwhile, the Brazilian Real has shown a classic “Buy the rumour, sell the fact” move on the back of the much anticipated impeachment of President Rousseff. The currency has performed well, despite the on-going weakness in the economy and public finances. Now comes the issue of just how quickly a new regime can turn things around. It’s not going to be easy and the Real has already priced in a lot of optimism.

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