Forex Trading

It is only a matter of time before the rebound in investor sentiment is measured against the current (and expected future) state of fundamentals. With corporate earnings crossing the wires and first quarter GDP numbers soon to be released, those trading safety for the prospect of yield will soon see whether their balance of risk and reward can truly hold up.

• Risk Appetite Put Off Its Pace As Growth And Earnings Forecasts Factor In
• Fed Moves The Results Of Its Stress Tests To Next Month
• Will Earnings Reports That Are Deep In The Red Encourage Investor Confidence?

It is only a matter of time before the rebound in investor sentiment is measured against the current (and expected future) state of fundamentals. With corporate earnings crossing the wires and first quarter GDP numbers soon to be released, those trading safety for the prospect of yield will soon see whether their balance of risk and reward can truly hold up. Taking stock of optimism through the activity of the market’s most speculative asset classes, we can still see momentum behind a bullish crowd. Despite the significant and ongoing event risk for the equity market, the S&P 500 has pushed ahead to a new, two-month high; while the VIX volatility index pulled back to its lowest level since September. Looking up to the banks-level of investing, we can see the same buoyancy through thawing credit and deflating risk premiums. Credit default swaps are the cheapest they have been since before the October market collapse. Even junk bond spreads have eased nearly 15 percent off their record highs just a month ago. However, there are signs that this rebound is running short on momentum and is looking for fundamental fuel to sustain a true recovery. Such evidence is most apparent in the currency market. The Carry Trade Index advance has stumbled, while both the US dollar and Japanese yen (the two primary safe haven currencies) cut off unfavorable breakouts. Looking behind price action, risk continues to ease with FX market volatility the most stable it has been since the beginning of October. Alternatively, the returns continue to deflate along with economic activity.

Though there has not been a sharp reversal in the markets, there has been an irrefutable deceleration in the broad-based rally. The resurgence in optimism since the beginning of March has, to this point, largely sustained itself on a deflation in perceived risk. Market sentiment and trends are essentially based on an equilibrium of risk versus reward. It stood to reason that after months of congestion and in the absence of another financial crisis, side-lined capital would eventually find its way back into risk-sensitive assets. However, the scales have yet to permanently shift in favor of yield seeking. Looking at the other side of the equation, we still see a severe lack of return on those securities that sport the necessary liquidity to define broad financial trends. And, considering both current data and forecasts are pointing to further retrenchment in yields and returns, there is little reason to believe investors will be rewarded for their speculative investments any time soon. This may be a realization that translates into price action over the next few weeks as major corporations release their quarterly earnings reports. So far, there have been a few notable reports that have beat expectations; but it is important to recognize that they are still firmly set in the red. This concept will be particularly significant with the US Bank’s quarterly numbers. With the Fed pushing back the results of its stress test until May 4th; speculation will develop through income, write downs and plans to pay back TARP loans. What’s more, we will also start to see returns on a global scale as GDP numbers start to print.

Written by John Kicklighter, Currency Strategist
Article Source - Risk Appetite Put Off Its Pace As Growth And Earnings Forecasts Factor In