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    Is last week’s rebound in risk assets for real?

    Some technicals

    The past week has been marked by a strong comeback in risk assets, with the key S&P 500 benchmark rising by around 100 points from its low on February 11.  The fact that US stocks managed to rise three days in a row this week (for the first time this year) was significant, as the lows of the 1800-1820 area held.  The subsequent rally pushed the S&P as high as the 1920-1930 region.  The rebound in the S&P 500 could become more important and positive if the index manages to break above 1950 and hold that area.  A similar upward reaction in early February failed just below the 1950 level and the 50-day moving average is near there as well.

    The oil deal

    One thing that helped stocks to rebound was the deal between Russia and Saudi Arabia in Doha, Qatar, to freeze output at January’s levels.  Oil prices managed to rise by almost 20% from their lows at some point.  The deal was not so significant in the short-term and it was contingent on the reaction of other producers.  After all, both Russia and Saudi Arabia, the world’s two biggest oil producers, produced near-record levels and the oil market requires production cuts, not freezes, in order to balance.  However, the fact that Iran, also a major oil exporter which represents an obstacle for agreed production cuts, welcomed the deal, was a positive sign for oil.  There is a widespread belief that tension between Saudi Arabia and Iran, as the countries are fighting on various different Middle Eastern fronts through their Sunni and Shia proxies respectively, was spilling into the workings of OPEC and preventing the organization from dealing with the oil price collapse more effectively.  Therefore some signs of rapprochement between the two countries – at least on the subject of oil production – would be bullish for oil as it would facilitate eventually reaching a decision to restrict output.

    Key safe havens stand their ground

    Developments in oil had important consequences for a number of other markets, but certain key safe haven plays did not seem as moved by the news of the deal.  A sense of relief and optimism that the worse is behind us should be reflected in reduced demand for safe haven assets.  Two popular safe havens, gold and the Japanese yen, did lose some ground but key psychological levels such $1200 an ounce for gold and 115 for dollar / yen were not seriously challenged.  The failure of these safe havens to confirm the rebound in risk sentiment by taking out key levels, creates some suspicions as to the durability of the comeback in stocks.

    The Fed, the economy and rates

    Of course higher gold prices, a stronger yen (vs a weaker dollar) and low Treasury bond yields can also be reflective of expectations of looser monetary policy out of the Federal Reserve and not only risk aversion.  On this point, the week presented some mixed signals.  On the one hand, the minutes from the Fed’s latest meeting did show a need to recalibrate the intended interest rate policy path to be in tune with the latest developments.  On the other hand, a speech by San Francisco Federal Reserve President John Williams stated pretty much the obvious that recent economic data have been painting an overall positive picture of the US economy.  For those worried about low inflation, January inflation numbers also surprised on the upside.  Therefore, markets and traders were perhaps jumping the gun when they are pricing that the Fed will be on pause for a long period of time.  For the Fed to hold off from further interest rate hikes it is necessary to have evidence of real damage to the economy.  Such damage might not be as quickly forthcoming as markets like to think as there have been generally good news on inflation, unemployment, wages and retail sales lately.  Therefore it is likely to take something bigger than what is happening today to force the Fed on sidelines.

    Gloom in Europe as euro and sterling underperform

    The pressure on sterling ahead of a possible referendum on Brexit appears to be quite intense and it’s looking difficult for the pound to rally even on good news.  The chance of Brexit – even if it is not the main scenario – appears to be following the pound like the little rainy cloud that follows cartoon heroes.  Brexit might also be weighing on the Bank of England as the underlying economic situation in the UK is not so bad but the uncertainty around this key event means that even thoughts of rate hikes will have to wait for the referendum.

    At the same time, it has been a difficult week for the euro too as the single currency’s retreat against the US dollar and the 2 ½ -year low against the yen shows.  The fresh low versus the yen is one indication that the yen is preferred to the euro in turbulent markets, even if many consider both as safe havens due to their nature as funding currencies.  Interestingly, the political, banking and immigration problems that the European Union is facing, could be hurting the euro.  A possible Brexit would certainly exacerbate such political and economic problems, while the ECB is also set to enhance its negative interest rate policies and Quantitative Easing program when it meets next in March.  Granted the Eurozone is a net exporter and the euro is relatively cheap in purchasing power terms, but in the short-term it appears to be suffering more, despite its safe haven reputation.

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