US Federal Reserve's Jerome Powell. Photo: Reuters / Sait Serkan Gurbuz
The US Federal Reserve's Jerome Powell. Photo: Reuters/Sait Serkan Gurbuz


1. Fed A-head

The US Federal Reserve’s first meeting with new head Jerome Powell at the helm takes place on Tuesday and Wednesday and an interest rate rise – this year’s first – is seen as a done deal.

Against the backdrop of brewing inflationary pressures, mortgage rates and Treasury yields have been rising and risk assets including equities and junk debt prices have been exhibiting signs of stress.

World investors will be paying close attention to the wording of the Fed statement for clues on whether Powell and co think conditions are now strong enough to hike rates beyond the three the financial markets have been forecasting. Oh, and what they think about the risk of a global trade war.

2. Something New (Zealand)

The March 22 meeting at the Reserve Bank of New Zealand should be eventful, but not for the normal reasons. For almost no one expects a change in rates. But the RBNZ is having a change of guard. Adrian Orr takes over as governor on March 27 from Grant Spencer.

A new Policy Target Agreement (PTA), which is to be signed between the incoming governor and the country’s finance minister, must also be released before Orr takes over. It could allude to the employment objective that the government wants to include in the RBNZ mandate and is seeking parliamentary approval for.

As for interest rates, markets expect no change until mid-2019. Economic conditions – growth seen slightly above last year’s, below-target inflation, a stable currency and rising share prices – validate those expectations.

New governor Orr has worked for the RBNZ before and is considered a continuity candidate, but analysts warn against taking a change of guard for granted though. They cite the example of Philip Lowe at the Reserve Bank of Australia, who surprised markets with his focus on financial stability.

3. The Moody’s blues

Emerging market investors’ love for South Africa and Russia will be severely tested, with Moody’s set to deliver a long-awaited verdict on South Africa’s last remaining investment grade credit rating by March 23, and Russia facing Western condemnation over a nerve agent attack on British soil just as Vladimir Putin limbers up for another presidential election win.

South African assets have rallied hard this year on a turnaround ticket, with new President Cyril Ramaphosa pledging to fight corruption, implement much-need structural reforms and kickstart growth. The country’s bonds are now international investors’ top “overweight” in portfolios linked to JPMorgan’s GBI-Emerging Markets index, so the rating call could be tense.

Russian assets, meanwhile, have come under scrutiny, amid the potential for more biting and globally coordinated sanctions on Moscow if the spy poisoning case escalates further.

So far bond investors appear largely unperturbed. There was strong interest for a new Russian Eurobond, which landed on big funds’ desks just as Britain and the United States were expelling dozens of Russian diplomats.

4. Pound(ing) headache

Next week will be a crunch one for sterling traders. A key summit between British and European officials Thursday and Friday next week could yield a “provisional” deal on a post-Brexit transition period, though with wide differences still on the Irish border conundrum, dealers aren’t taking chances.

The pound has made a solid recovery – against the dollar at least – over the last year. “Long” positions on the US dollar vs the pound are only fractionally below a three-year high. But if there is no sign of a deal and a “hard” Brexit is suddenly the base case again, the currency would almost certainly go skidding again.

Implied sterling volatility options show it well. They are more in demand than other G10 FX counterparts, showing just how nervy the pound markets are feeling.

Add to the mix that there will also be a Bank of England meeting on Thursday. Any sniff of a transition deal might give it cover to strike a more confident tone on further rate hikes this year. Just like Brexit, rate markets are looking to May.

5. The shorts are on

Hedge funds have been ramping up their bets against European equities in recent weeks. “Short” demand for European equities is now up 18% year-to-date and the current total short position is $188 billion, just below a post-euro crisis high of $193 billion it hit a month ago.

With a strong economic backdrop and more attractive valuations than US equities, what’s pushing investors to short the European market?

The strong euro is one reason hedge funds think the region’s corporate earnings won’t live up to share prices. And political risk – the main reason why short positions increased last year – has reared its head again with the complicated outcome of Italian elections this month.

But another reason may be strategic: Analysts say it has been cheaper to “short” a basket of big European names than those from across the pond. European stocks also have a higher “beta”, or correlation, than US stocks to the broader market when it is going down. So a bet against Europe may simply be the most efficient way to bet against markets overall.

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