Multi Asset Weekly: Payrolls data highlights policy divergence

This week will be dominated by the launch of the heavily anticipated quantitative easing program by the ECB. A strong US non-farm payroll reading on Friday underlined the stark contrast in circumstances for..

ETF Securities Research

the Federal Reserve and the European Central Bank. As demonstrated on Friday, European and American economies are likely to continue to diverge in line with prospects for monetary policy. However, after the official Chinese growth target was lowered this week attention may shift to Chinese lending data due next week.


Freezing weather conditions support natural gas prices. Snowfall and frigid temperatures in the eastern half of the US boosted heating demand for natural gas. A larger-than-expected withdrawal from natural gas inventories last week sent prices higher, with Henry hub gas ending the week up 5.3%. Reports that US crude stocks rose to a record 444.4mn barrels last week failed to prevent WTI prices climbing higher. The US crude benchmark was supported by a release of the Federal Reserve’s beige book which detailed the likely cut in capital expenditures by US oil producers in 2015 as the plunge in oil prices impacts the industry.  Carbon prices fell 4.4%, as coal-reliant members of the European parliament posed a potential roadblock to negotiations towards the relief of the current oversupply of allowances in the emissions market. 


Confirmation of QE sends gold miners lower. After reaffirming the launch of quantitative easing, Mario Draghi delivered a relatively upbeat assessment of the Eurozone’s economic prospects. The positive tone sent European bourses rising with the DAX 30 and FTSE MIB climbing 1.6% and 1.1%, respectively. The prospect ofstimulus in Europe boosted sentiment and dented safe haven demand for gold resulting in its decline through the psychological US$1,200/oz level. The fall in gold pricescaused DAXglobal® Gold Miners Index to fall 4.8%. The strong performance of European stocks pushed volatility lower and the EURO STOXX 50® InvestableVolatility Index to its lowest level this year at 15.3. The MSCI China A Index fell 0.9% as the Chinese premier Li Keqiang reduced the official growth target to 7.0% from 7.5% as the country tackles structural and economic reform.  


Divergent monetary paths pressures Euro. Last week the prospect of the ECB’s QE programme launch caused the Euro to fall to an eleven and a half year low against the US dollar. These losses were extended on Friday as a strong US non-farm payroll reading increased the likelihood of US rate normalisation starting at the Fed meeting in June. Recent indications that the US economy continues to strengthen brings the timeline for higher interest rates forward. While in Europe the ECB plans to loosen monetary policy and various central banks have put negative interest rates in place to combat deflation. The differing outlooks have sent the Dollar and Euro in opposite directions against other major global currencies, a trend which only looks set to continue.


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