The return of risk aversion

Risk aversion made a return to the market yesterday after some poor data out of the euro zone and decidedly mixed data out of the US spooked the markets.

Overall risk appetite and the euro in particular was hit by disappointing data. This latest data release showed that although the German economy grew during the first quarter of 2014 at a faster rate than had been expected the broader euro zone economy is not faring as well. Germany's gross domestic product (GDP) rose by 0.8% in the first quarter of 2014 against the last quarter of 2013 with the year-on-year rate also beating expectations at 2.5%.

Analysts were quick to point out that the euro zone recovery seems both slow and unbalanced with weaker than expected growth in the first quarter of 2014 of 0.2% in the euro zone as a whole and a huge divergence between the region’s major economies with the French economy, the second largest in the region, stagnating.

Speculation is again increasing that the European Central Bank (ECB) may cut interest rates at their next policy meeting due at the beginning of June and prepare a quantitative easing programme for use in the near future.
Meanwhile the US dollar also fell after a decidedly mixed bag of economic data which included a rise in the rate of inflation with an unexpected drop in jobless claims and a fall in industrial production.

Data showed that US inflation has risen to 2%, in line with the Federal Reserve's target suggesting that the Fed could come under pressure to taper at a faster pace and even raise rates earlier than currently planned according to analysts.

Meanwhile, the US Bureau of Labor Statistics (BLS) reported that the initial US weekly unemployment claims fell by 24,000 to 297,000 over the seven days ending on 10 May, a post-recession low and US industrial production unexpectedly declined by 0.6% in April after being revised upwards by 0.9% in March.

Overnight, data showed that the Japanese economy picked up sharply in the first quarter of 2014 driven by a consumer buying spree ahead of a sales-tax rise that began in April.

Japanese Gross domestic product (GDP) expanded at an annualised rate of 5.9% in the first quarter of 2014, up from just 0.3% growth in the fourth quarter of 2013. This is the fastest rate of growth since the third quarter of 2011 as the world's third-largest economy recovered from the after-effects of the Tsunami and subsequent nuclear meltdown at Fukushima.

Analysts speculated that the data may cause significant doubt as to whether the Bank of Japan will necessarily need to implement any second round of monetary stimulus as has previously been widely expected.

The only significant news out of the UK yesterday was the appointment of US economist Kristin Forbes who will become the first woman to serve on the Bank of England’s monetary policy committee (MPC) in 5 years. The MPC is responsible for setting UK interest rates. Ms Forbes became the youngest ever economic adviser to former US president George W Bush at the age of 33 and is currently a professor of global economics at the Massachusetts Institute of Technology (MIT). She replaces Ben Broadbent on 1 July, who will become deputy governor for monetary policy when Charlie Bean retires from the (MPC) in June