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Research Market strategy
by Swissquote Analysts
Daily Market Brief

EM currencies tumble as commodity prices slide

EM currencies in the doldrums ahead of NFP and French election

By Arnaud Masset

Emerging markets currencies tumbled on Thursday amid a sharp correction in commodity prices and mounting expectations of a June Fed rate hike. The West Texas Intermediate hit $47.31 a barrel this morning while its counterpart from the North Sea fell to $50.26 amid supply glut worries. In China, the price of iron ore fell as much as 8% overnight, before trimming losses at around -5%, amid concerns over weak demand. Iron ore futures for delivery in September on the Dalian Commodity Exchange slid to CNY 499 a metric ton.

The South African rand was the worst performing currencies this morning as it tumbled 0.60% against the greenback. The rand retraced more than half of last month’s gains as the country’s unstable political landscape takes centre stage once again. The anti-Zuma sentiment is mounting in the country and international investors definitely do not like it. USD/ZAR has broken the 13.3294 resistance (Fibonacci 38.2% on March-April rally) and is currently heading for the following one at 13.6316 (200dma), if broken the road is wide open towards 13.9578 (high from April 10). We therefore maintain our negative view on the currency and wait for a period of stabilization before betting on a correction.

Earnings growth helps support valuation

By Peter Rosenstreich

Equity markets were well behaved after the FOMC meeting closing slightly lower after pullback. The fact was there was nothing really ground breaking nor indication that rate path would be steep enough to derail current risk rally. US earning season is nearly over any so far the results have been extremely positive. Of the 300 companies reporting 75% have signaled positive growth earnings (even stagnant Apple reported earnings growth while buyers waited for iPhone 8). Upside surprises came from cyclical sectors such as consumer discretionary, industrials and materials but consumer staples and defensive earning were flat. Rise in gasoline prices in 1Q lowered household free cash, support by sluggish retail sales constricted earnings growth.

Steepening of the US yeild curve should benefit financials moving forward. Real estate sector is likely to be most vulnerable by rising interest rates. Should earning growth continued at this pace, calls of overvalution become more complicated. In the ultra short term we could see a minor bearish consolidation ahead of the French elections.

 
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