Last week cannot easily be defined as either “risk on” or “risk off”.
The S&P 500 was choppy but ended the week up 1.6% thanks in part to US macro data giving equity-bulls reasons to be cheerful. US initial claims fell to just 684,000 in the week to 25th March – the lowest weekly number since the beginning of the pandemic a year ago – and the S&P closed up 0.5% on the day. Even more importantly the release on Friday of slightly below consensus inflation data arguably contributed to the S&P 500 closing up 1.7% (its largest one-day rally since 1st March). Core PCE-inflation, the Federal Reserve’s preferred inflation measure, fell to 1.4% yoy in February from 1.5% yoy in January. This has given some credibility to the Fed’s forecast that inflation would only rise gradually this year and was unlikely to materially overshoot its medium-target of 2%.
However, the “safe-haven” Dollar – which has typically been negatively correlated with US equity indices – appreciated throughout the week, by an aggregate 1% in trade-weighted terms, and has rallied further in the past 48 hours. Moreover, while oil currencies (Norwegian Krone, Canadian Dollar) benefited slightly from the rebound in crude oil prices, the risk-sensitive Sterling was broadly unchanged last week, as was the Euro and safe-haven Swiss Franc.
The European Council’s decision (on 25th March) to stop short of imposing a ban on exports, including to the UK, of vaccines manufactured in the EU has seemingly had little net impact on either Sterling or the Euro. Sterling was buffeted by somewhat mixed UK macro data. Both core and headline CPI-inflation fell far more sharply than expected in February but the flash composite PMI rose sharply to 56.6 in March from 49.6 in February, pointing to a decent bounce in UK GDP growth in the month.
The biggest losers last week were the Australian and Kiwi Dollars, which in trade-weighted terms depreciated 0.8% and 1.6% respectively. The Kiwi Dollar collapsed on Tuesday after Prime Minister Arden’s government announced measures to cool the domestic property market, with financial markets subsequently dialling back their expectations for RBNZ rate hikes. The Kiwi Dollar has since lacked clear direction.
