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Posted by: mercati     

G10 Currencies    EUR-USD: Following a long period of giving only vague hints the Eurogroup, the Eurozone Ministers of Finance, made more concrete comments yesterday, providing more detailed information on their aid plans for Greece. The opposition of the German government against a more concrete aid offer therefore seems to have been overcome – at least partially. “Coordinated bilateral aid” is the solution, which the Eurozone countries are aiming for in case the debt crisis in Greece leads to a buyer strike. “If it became necessary Greece would get support under all circumstances“, is the message which the head of the Eurogroup Jean-Claude Juncker wanted to send to the markets. Was it a success? Hardly, measured by the market reaction. CDS spreads have not reacted measurably to the news and the euro even lost ground. The measures were introduced “in order to avert a crisis for the euro”, one commentator wrote this morning. In our view the measures agreed by the Eurogroup are more likely to constitute a burden for the European single currency. Only a complete plan, which defines not just the aid payments but also the conditions it is linked to, the control mechanisms and the sanctions to be taken in case the conditions are breached, would have the potential of causing a sustainable correction in EUR-USD. This variation, which currently constitutes the central scenario, is becoming less likely due to yesterday's agreements. As control mechanisms and sanctions are not realistically bilateral, but can only be imagined on a Eurozone level. The announcement of bilateral aid makes the establishment of these mechanisms seem less likely. The only hope that remains is the fact that the coordination of the bilateral aid payments was announced.    USD: From the point of view of USD investors today's FOMC meeting is likely to be a disappointment. It is likely to remain part of the statement again today that key rates will remain “exceptionally low for a prolonged period of time”. The disappointment of those who are hoping for this wording to be revised soon could only be avoided if a rising number of FOMC members does not like this wording. Last time Kansas City Fed governor Tom Hoenig had already voted against this wording. Should Hoenig be joined by another member this would suggest that the camp of the hawks is growing. But it is not very likely. An unchanged statement is only likely to but notable pressure on the dollar against the yen. In EUR-USD the drivers from the Eurozone (see above) are likely to continue to dominate.    GBP: The pound fell against the euro again yesterday whilst under pressure from the U.S. Dollar. Against the background of the high budget deficit, the rating agency Moody's said that Britain was clearly at risk of losing its AAA rating. In addition, statements by Federal Reserve member Kate Barker stated that the British economy could even have a negative quarter of growth. Although they also said that they did not believe in a renewed recession in the UK, findings of how fragile the economic recovery is were confirmed, further suggesting that the expansionary monetary policy will remain for quite a while.   CHF: Following a breach of the 1.45 mark EUR-CHF rapidly approached the 1.45 mark. This has made it clear to everyone that the SNB is not defending a certain level but is pursuing a policy of ”leaning against the wind“, so it only tries to reduce the speed of the appreciation. Such a policy entails the danger of attracting CHF buyers more than ever. A central bank loses if it pursues this strategy. After all it is continuously buying EUR-CHF in a falling market. And as FX markets are a zero sum game that means that the rest of the market participants make profits. The situation could become particularly precarious for the SNB once it begins to mind how much CHF liquidity it creates with the help of these interventions. In that case it would become too obvious a victim of speculative CHF buyers. The last SNB statement, in which it considered the danger of deflation to have fallen, is however pointing exactly in that direction.    AUD: Markets have already digested the slightly less hawkish RBA statement at the beginning of the month – the majority of market participants expect the RBA to leave rates unchanged in April. Even though the RBA announced further rate rises it was less outspoken: “The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.” In previous statements the bank had said that “the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term”. In our view these statements are a sign that following the rapid start of the RBA's rate cycle (25bp each in October, November and December) it will now take smaller steps – a fact that it had already signalled by keeping rates unchanged in February. That is why the minutes of the meeting in early March when rates were raised to 4.0% didn’t provide any really new information, only the confirmation that “interest rates will move gradually towards more normal levels”. Hence, we stick to our outlook for the AUD: in general we remain optimistic for AUD and see a chance that AUD-USD might once again rise towards 0.93. Following three unsuccessful tests of the 0.92 mark this is likely to be difficult though.    Emerging Market Currencies    PLN: The Polish rate of inflation for February came in slightly below expectations. At a yoy rate of 2.9% the inflation target (1.5% to 3.5%) seems easily obtainable, with the risks pointing to the downside. So no reason to raise rates for the foreseeable future? By year end the inflation development trend is likely to have reverted – also according to the central bank. But as monetary policy usually effects inflation with a time lag of several quarters, a start of the rate rise cycle in the second half of 2010 is still appropriate.   Yesterday's inflation figures – and those for the following months – say very little about that. As a result this news is unlikely to have long lasting effects on EUR-PLN. The news on the budget situation is likely to more relevant and it is not PLN positive: Yesterday the IMF confirmed our view that the target of reducing the budget deficit to below 3% of GDP by 2012 was little realistic.

Tags: G10, Currency, US, GBP, Euro
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Posted by: mercati     

 
The President of the European Commission has dampened speculation that the EU is working towards the creation of a European Monetary Fund to bail out struggling euro zone economies.

Speaking in Strasbourg, José Manuel Barroso also dismissed suggestions that the EU had not properly scrutinised economic data from the Greek government.

Germany's Finance Minister Wolfgang Schaeuble had suggested that a European equivalent of the International Monetary Fund should be created.

AdvertisementHowever, Mr Barroso told MEPs today the idea was presented without details, and it was a longer term proposal that would require changes to existing EU treaties.

He added that the current priority was to work on bolstering economic co-ordination with member states and greater surveillance of euro zone economies.

Earlier, he was asked if the Commission had suspected that the Greek government was publishing incorrect figures to conceal the extent of its borrowing.

However, Mr Barroso said the Greek figures were scrutinised precisely because of such doubts.

He added the blame lies with the Greek government for not respecting the terms of the growth and stability pact, which limits the amount of money euro zone governments can borrow.

Tags: Eurozone, Fund, Barroso, IMF
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Posted by: mercati     

 
The IMF recently revised up its global growth forecast for this year and next and now expects the world economy to expand by 3.9% in 2010, followed by 4.3% in 2011.

Bank of Ireland UK Financial Services: A monthly analysis of international and Irish markets

The projected expansion is heavily skewed towards the emerging economies, however, notably Asia, and within the advanced economies there is also a pronounced dichotomy, this time between the US and Europe.

The US economy picked up momentum in the latter part of 2009, growing by 1.4% in the final quarter, and the most recent data implies a strong start to 2010, with the result that the consensus GDP forecast for the year as a whole has moved higher and now stands at 3%.

In contrast, the euro economy lost momentum in the final months of last year - Italy contracted and German growth was flat – leaving GDP growth in the fourth quarter at just 0.1%. Moreover, the most recent data points to a weak first quarter exacerbated by adverse weather, and the consensus growth forecast for 2010, currently 1.2%, may well be revised down.

The most recent data on the UK economy has also tended to surprise to the downside, although again the January figures were no doubt hit by the weather. The Bank of England has also become less optimistic on the UK growth outlook, and has revised down its growth projections for this year and next.

These developments in the relative growth outlook have already influenced the FX markets, boosting the dollar, and interest rate expectations are also changing. Specifically, it now looks less likely that the ECB will raise rates this year, given the anaemic growth outlook for Europe and the implication that inflation will stay low, and we now expect the repo rate to stay at the current level until the first half of 2011.

Nothing is certain, of course, but the ECB is likely to spend the rest of the year draining cash from the system in order to bring money market rates up to the repo level – short term rates are currently well below the 1% repo rate, so any move in the latter would be ineffective anyway until the monetary overhang is addressed.

The picture is less clear cut in the UK, as inflation is currently well above the 2% target and the unemployment rate appears to have stabilised, but the Bank of England feels that inflation will fall back and remain at low levels given the amount of spare capacity in the economy.

Consequently, we now expect the first rate rise in the UK to emerge in the spring of 2011. For the US however, we still feel that rates will still start to rise this year, albeit in the autumn at the earliest.

Tags: Economy, World, Expansion, Development
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Reason  

Posted by: Editor     

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Economics:
 
- The Bank of England left interest rates on hold at 0.5% this week and announced a pause in its quantitative easing programme. While the Bank will continue to purchase private sector assets funded by T-bill issuance, it has no plans to increase further its gilt purchases funded through central bank reserve creation (i.e. QE).
 
- The Bank will publish its next Inflation Report (in which it will update its forecasts for economic growth and inflation) on Wednesday 10 February. In the near-term the MPC will probably be forced to raise its forecasts for inflation – which continued to surprise to the upside towards the end of last year. Looking further ahead, however, the Bank's inflation forecasts may be revised down, especially if the MPC is less upbeat on the outlook for growth.
 
- Rising gilt yields has been forcasted in 2010 (4.80% by year-end – a rise of close to 100bps from current levels) as the BoE steps away from the table and risks remain about the possibility of a hung parliament and/or sovereign ratings downgrade. While the view is for Bank Rate to rise from August this year to 1.50% by year-end, the risks seem to be weighted towards a more moderate or delayed tightening.

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Politics:
 
- With a general election likely in just three months’ time there is increasing focus on the political opinion polls. Recent results suggest the risks of a hung parliament have increased, an outcome that could have negative consequences for gilt yields and the currency.
 
- There are uncertainties about how policies to tackle the deficit would differ under a Labour vs. Conservative government. While current Treasury forecasts may change in a pre-election Budget, opposition policies have been thin on detail.

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Strategy:
 
- The BoE indicated a pause in QE but kept the door open for an extension if economic data deteriorates further.
 
- An extension of the policy is not expected anytime in the future and expect this pause to eventually lead to an end of QE. A turn in the inventory cycle and positive credit impulse should support economic data in H110 and concerns over high inflation should negate any further extension of QE.
 
- As the BoE vacates the seat of the main buyer of Gilts, fundamental factors should move back into the driving seat. Fiscal deterioration, net supply imbalance, sovereign rating risks and the tail risk of high inflation should support our bearish stance on UK rates.
 
- The bearish UK versus Euroland rates view is also maintained as the Euroland economy is expected to underperform UK and the risks of higher inflation are greater in the UK than in Euroland.
 
- The UK short end rally appears overdone thus exposing carry trades to the risk of a sharp selloff.

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Linkers:
 
- UKTi breakevens tightened further this week amid rallying nominal yields. The Bank of England as expected suspended its asset purchase programme and while the news initially weighed on nominal Gilts, yields quickly turned lower again in the global flight to quality driven bond rally.
 
- While the current global market backdrop is weighing on B/Es, we continue to believe that more than elsewhere conditions are in place for a further widening in B/Es.

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The Month Ahead:
 
- Key data & events this week: Market focus will be on the BoE's Inflation Report, where downward revisions to the Bank's expectations for economic growth is expected to be seen (but revisions up to its near-term inflation forecasts). Industrial production data on Wednesday are forecast to show a small rise during December. On the housing market the RICS survey is published overnight tonight while construction orders and repossession figures are also due this week. Elsewhere, international trade and retail sales (BRC) figures are due early this week.

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Tags: Politics, Economic, Strategy, UK
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Posted by: Editor     
 
Over the past few days the most important currency pairs have been drifting sideways without following a recognisable trend. The important drivers (risk aversion, carry advantages or disadvantages) have either worn off or they are not yet effective (expectation of new rate cycles). That does not mean that we have reached a temporary end of volatility. If anything intraday ranges are getting bigger again. And implied exchange rate volatility is more likely to have bottomed and is offering upward potential. It is hardly likely that many market participants would consider the current exchange rate environment – weak dollar, strong yen, Sterling somewhere half way in between – to be well balanced long term. It is more of a temporary compromise. Markets have already priced this view in. Volatility curves are steeper than they have been for some time. 
 
 
G10 Currencies 
 
USD: Yesterday's inflation data came in a fraction above most analysts’ expectations, but this ”mini“ surprise was not sufficient to induce a change in rate expectations. July contracts continued rising to 99.70 – suggesting the small possibility of a rate rise in June. Nonetheless the well familiar picture is repeating itself: EUR-USD is unable to benefit from the remnants of rate fantasies being priced out. We do not expect any momentum from the data front today. Initial jobless claims from the US are hardly going to lead to a complete re-evaluation of the situation on the US labour market and are therefore unlikely to have an effect. The Fed itself is also unlikely to provide any new momentum. Even though a known hawk, Richard Fisher, is due to speak today, he has made his point of view very clear over the past few weeks so that he is unlikely to provide any news. 
 
GBP: EUR/GBP managed to recoup some of its recent losses yesterday after the minutes of the November BoE meeting revealed that one MPC member voted for an extension of the asset purchases program by more than the 25 bn GBP which were eventually approved. This, in turn, strengthened market fears about further increases in QE going forward, weighing on the pound across the board. We think that these concerns should gradually ease in the coming months, given BOE's well communicated data-dependent approach and especially in view of our expectation of a rebound in the UK economy at the end of 2009 and the start of 2010. In the near term, however, the GBP should remain under pressure as weak economic fundamentals and still fragile banking sector fuel speculations about more asset purchases by the BoE. Looking at today's data, the retail sales for October should support the view of a gradual recovery in domestic demand. The release could put EUR-GBP under some pressure again. In addition, growing speculations about intensifying takeover battle for Cadbury could support the GBP further across the board. We think, however, that a drop in EUR-GBP below the recent lows around the 0.8842 mark would prove difficult today. 
 
CAD: For the first time since May the Canadian rate of inflation has returned to the positive. In October the rate rose to 0.1% yoy, confirming expectations. The core rate climbed to 1.8% compared to previously 1.5%. In October the Bank of Canada had forecast that inflation would only reach the target value in Q3 of 2011, while previously it had expected it to reach this level in Q2 2011. The CAD was able to appreciate short term but external factors quickly gained the upper hand again. The support in the area around 1.04 in USD-CAD is holding. There is no data due for publication in Canada before retail sales next week. Until then general market sentiment will provide direction in USD-CAD. 
 
 
Emerging Market Currencies 
 
CNY: US president Barack Obama's visit to China ends on a friendly note but the conflict of interest regarding exchange rate policy is difficult to disguise. The idea of a tacit agreement, which some analysts and journalists had been dreaming up under the heading of ”Bretton Woods 2“ over the past few years, can go to the scrap heap of ideas. Instead a conflict of interest has been emerging: So as to support its local export sector China wants a weak renminbi while the US is interested in a strong renminbi in an effort to protect its local manufacturing sector. It is dishonest to talk about “balanced“ and “unbalanced“ situations. It is difficult to determine where a “balanced“ USD-CNY exchange rate would be located and this depends heavily on the interests of the observer. Any objective observers should keep quiet on the matter. 
 
KZT: Grigory Marchenko, head of the Kazakh central bank, has managed to perform a change of direction towards a sensible exchange rate policy at the last minute. While only a few days ago he was talking about an exchange rate range of ”20 or 30 tenge” (see FX Hotspot: How strong can the tenge get? dated 13th November) he has now presented a plan for a controlled tenge appreciation that will take place at an adequate speed. Until early February the tenge will be allowed to appreciate to a maximum of 145 USD-UAH. After that the central bank will re-evaluate the situation. If oil prices remain high and if the banking system remains sufficiently stable the tenge will remain under appreciation pressure even then. The central bank is however likely to chose a speed which is unlikely to threaten the real economic recovery excessively. We will have to wait and see however, whether this will suffice to prevent speculative inflow – as Marchenko had hoped yesterday. 
 
UAH: Ukraine's Foreign Minister and head of the central bank supervisory board Petro Poroshenko spread new hope yesterday that Ukraine might receive new funds from the IMF as early as December. The fund interrupted its aid payments a short time ago when it became clear that the country was not displaying sufficient fiscal policy austerity. Poroshenko now promised new budget legislation obviously designed to placate the IMF. But experience tells us that the implementation of reforms that are obviously necessary cannot be taken for granted. It is therefore far from certain whether IMF funds will start flowing again this year. 
 
TRY: Today a key rate cut by 25 bp is widely expected and should therefore not influence the exchange rate of the lira. However, from a longer term perspective a lower carry implies a higher risk of a lira setback. 
 
Tags: Currency, News, Information, Update
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Posted by: Editor     
 
Market Headlines:
 
$       The FDIC said it had 416 banks on its “problem” list at the end of Q2, up from 305 at the end of Q1; the FDIC's deposit protection fund fell to $10.4bn in June versus $13.3bn in March
 
$       Fed's Lacker (voter) said he will “be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide"; a pick up in growth and consumer spending is important in determining the timing of rate hikes
 
$       Fed's Bullard (voter in 2010) said the exit strategy will begin in 2010 although the Fed “intends to keep the fed funds target near zero for an extended period"; the exit strategy will be broad based, allowing for the expiration of special lending facilities and asset sales; the Fed is unlikely to raise reserve requirements
 
$       US Q2 GDP was unrevised at an annualized pace of -1.0% versus -6.4% in Q1; a downward revision to  inventories showing a larger contraction was countered by upward revisions to personal consumption, government spending, and exports
 
$       The price measure of core personal consumption expenditures (PCE) was unrevised at 2.0%QoQ in Q2 versus 1.1% in Q1
 
$       US jobless claims came in above market expectations for the third consecutive week, rising 570k in the week to 22 August following an upwardly-revised 580k increase in the previous week (576k originally); continuing claims fell 119k in the week to 15 August which brought the total to 6.13m the lowest since 3 April 
 
€       Eurozone M3 money supply rose at a slower 3m average annual pace of 3.4% in July versus 4.1%YoY in June; credit growth to the private sector slowed to 0.6%YoY versus 1.5%YoY previously, a record low in the series’ history since 1992
 
€       The Eurozone Bloomberg retail PMI fell for the second month, down 0.2pts to 47.1 in August
 
€       The German CPI was flat in August according to the preliminary figures, up from -0.5%YoY in July
 
£       UK GfK consumer confidence held steady at -25 in August versus the median market forecast for an improvement to -24
 
£       UK business investment fell for a sixth consecutive quarter, down 10.4%QoQ in Q2 versus -7.6%QoQ in Q1
 
£       UK CBI Distributive Trades Survey: the reported retail sales balance languished at -16 in August versus -15 in July, consistent with the previous 3m average
 
¥       Japan's CPI fell deeper into negative territory at -2.2%YoY in July versus -1.8%YoY previously; the core ex-energy & food rate fell to -0.9% from -0.7% previously, a pace last posted in Jul’02
 
The Day Ahead
 
The European Commission's August figures on Eurozone economic confidence are the main forward-looking events on the morning agenda. European consumer and industrial sentiment have lagged considerably behind their US counterparts in their return (recovery) to pre-Lehman crisis levels even if the hard GDP evidence shows that major European economies exited their strategy earlier than the US in Q2. This highlights the danger of attaching too much significance to “forward looking” economic indicators in an extraordinary economic and financial requirement. Furthermore, consumer inflation expectations have continued to fall to record lows each month, in contrast to the US, where inflation is much lower at –2.1%, and the UK, where consumer inflation attitudes rose this year. In a nutshell, the Eurozone “recovery” looks better, but it feels worse. We expect that the ECB will continue to play down the importance of the improving sentiment surveys and emphasize the significance of high unemployment and broken credit channels. Ahead of this, the UK will release the revised estimate of Q2 GDP, expected to be unrevised at -0.8%QoQ. In the US, the better-than-expected US CB consumer confidence survey earlier in the week and an improving news-flow from auto and housing sectors create upside risk to the final August estimate for the University of Michigan consumer sentiment survey.
 
In debt supply, Italy will auction up to €6.5bn in 2012 and 2019 BTPs and €2.5bn in 2016 CCTs.
 
Markets
 
The Chinese market has battled with the prospect of tighter bank capital rules for much of the past month and lost every time. Reuters reported this morning, quoting bank sources, that China's Securities Regulatory Commission had used "window guidance" to guide Chinese banks against excessive lending at the end of the month. Separately, Bank of China President Li Lihui said that loan growth will slow sharply in H2 versus H1. Shanghai shares lost 2.9% on the CSRC news; the Nikkei dove 08% in the early session before recouping losses. The pricing and re-pricing of negative liquidity news is a familiar refrain but also one that is meant to belong to a gone era, as policy and the market are now virtually unanimous that the worst is over (another “classic panic” is highly unlikely). However investors’ sensitivity to the negative impact of reduced market liquidity on private sector risk valuations – the very force that has driven this crisis - is a reminder that market stability remains heavily dependent on the policy cycle. This presents a major risk to investor risk sentiment ahead. While monetary policy across industrialized nations is set to remain accommodative for some time, both the G7 fiscal and regulatory cycles are set to turn in 2010, contributing to a less favorable market liquidity environment compared with this year. The recent market and economic recovery has been almost as extraordinary as the collapse that led to it, but – with banks still repairing their balance sheets and credit still falling – will it be enough (or sustainable) to ride the global economy through a less friendly fiscal and regulatory environment in 2010? 
 
Yesterday was a typical end-of-the-summer volatile day. US equities fell sharply at the open but then recouped losses to close marginally higher (S&P 500 +0.3%); financials ended up 1.0% on the day. Early losses came after back-to-back reports this week showed that US crude oil inventories rose due to a surprise rebound in imports and continued soft demand, which drove oil prices below $70bbl. An FDIC warning about a growing number of troubled banks and a depleted insurance theme also hurt investor confidence in holiday-thinned volumes. In forex, the dollar came in heavy selling against a basket of currencies in the last hour of trading amid talk that hedge funds had unwound long dollar positions. USD is down 1.3% vs CHF, and 0.9% lower against EUR and NOK. USTs are choppy; 10yr are yielding 3.49% last versus a 3.41-3.51% range yesterday. The curve bear-steepened, with the 2/10s at 243bps last vs 238bps at yesterday's European open. It begs the question of whether the Street is already long for Monday's index extension, or whether the market is jittery ahead of the approaching Lehman 1yr anniversary. We’ll see where prices close today. 
 

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Posted by: Editor     
 
Market Headlines:
 
$       The White House budget office and the Congressional Budget Office (CBO) are scheduled to release updated economic forecasts and deficit estimates on Tuesday
 
$       Dovish central bank sentiment dominates the annual central bank meeting at Jackson Hole: no surprises as policy officials unite around non-inflationary ample policy liquidity for longer
 
$       Fed Chairman Bernanke reiterated that “economic activity appears to be leveling out” and said there are good prospects for a near-term return to growth; however, the “economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels” as tensions persist in financial markets, banks face further losses, and households and businesses have difficulty accessing credit
 
$       Fed's Bullard: TALF to end over next 6-9 months if market/economic conditions improve; markets have not fully digested the significance of the Fed's pledge to keep rates low for a long time
 
€       ECB President Trichet issued a note of caution that green shoots do not mean conditions are back to normal; the ECB's position remains in line with that of the Fed and the BoE – improved growth outlook does not mean rate hikes
 
€       ECB's Nowotny suggests that no margin should be applied to the September 12m LTRO in order to avoid signalling expectations of a hike within that period
 
$       US existing home sales rose 7.2%MoM in July, a record increase in the series history since 1999, which brought the annualized pace to 5.24m versus 4.89m previously, the highest since August 2007
 
€       The Eurozone advance services PMI rose by a record 3.8pts in August to 49.5, the highest since May’08, the advance manufacturing PMI rose to 47.9 from 46.3 previously and was the highest since Jun’08, led by slight growth in output and new orders for the first time since H1’08
 
 
The Week Ahead
 
Conference Board consumer confidence survey tomorrow, the German IFO index on Wednesday, revised US Q2 GDP figures, Eurozone money supply/credit and EC economic confidence on Thursday, and US consumer sentiment, income and spending on Friday. The better-than-expected results from last week's Eurozone producer surveys confirmed the notion that credit-sensitive economic output is improving faster than final demand. A jobless, low-income, low-savings recovery would need to rely on improved optimism and re-leveraging to prove sustainable. This has worked well in the financial economy, where the bulk of policy effort is concentrated, but the transmission of central bank liquidity to the real economy remains disrupted. Without an actual improvement in company and consumer income, bank losses would lead to a new wave of negative financial valuations. This is what has led the Fed, the ECB and the BoE to effectively commit to a year of steady rates and generous liquidity provisions.
 
The policy agenda is quiet today. BoE's Bean will make a speech on Tuesday at 17:15 and Fed's Lockhart, Lacker and Bullard speak later in the week. The BoE will offer to purchase up to £4.2bn in gilts this week through its Asset Purchase Programme, beginning today with maturities in the 2019-2032 range, followed by 2034-2055 on Tuesday, and 2013-2019 on Wednesday. The Fed is schedule to purchase USTs on Monday (2011-2012) and Wednesday (2026-2039).
 
In new debt supply, Slovakia will auction €150m in 4-year, fixed-coupon bonds today. The US Treasury will sell $42bn in 2yr notes on Tuesday, $39bn in 5yr notes on Wednesday, and $28bn in 7yr notes on Thursday.
 
 
Markets
 
Equity markets soared on renewed investor risk appetite, encouraged by strong Eurozone PMIs, better-than-expected US home sale figures and the Fed's promise of ample liquidity, low inflation and a return to growth. Investors particularly focused on Fed Chairman Bernanke's comment that “the prospects for a return to growth in the near term appear good”.  The Dow rallied 1.7% to hit the highest level since Nov’08. The Nikkei surged 3.4% to 10,581.05, the largest increase since 7 May. Investor focus remained on developments in Chinese equities. The Shanghai Composite is up 1.1%. Equity futures are up strongly at the European open following on Friday's rally (DJ Euro Stoxx 50: +3.1%): DAX +73; CAC40 +34; FTSE +55; DJIA +63. The UST yield curve bear-steepened driven by resurgent stocks, risk- positive policy comments and stronger-than-expected data. The US 2/10s reads 249bps last versus 240bps at Friday's open. The US 10yr benchmark yield is up 16bps since Friday's European open to 3.56% last. Bunds are down 15ticks at the European start at 121.9 last; red-month futures implied Euribor rates continue to drift higher as central bank policy proves self-defiant. In forex, the euro powered ahead on Friday, supported by the continued signs of a leveling out in Eurozone economic activity.  EUR/USD is up 1.3% over the past week at 1.43 last. The Aussie is up against the rest of the G10 on higher commodity prices and soaring equities. The benchmark US crude future is trading above $74bbl versus $66.5bbl at the start of last week.
 

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While it appears that the majority of G10 economies have seen the bottom in their respective recessions, the ensuring recovery will likely be lower than historical standards and recent currency strength could be a potential impediment to growth for several countries, particularly in the commodity bloc.
 
Canadian Finance Minister Flaherty said yesterday that he is concerned about recent rapid changes in the CAD. He reiterated his opposition to speculative influences in the currency and said steps could be taken to dampen fluctuations, should there be indications of speculation, though he did not elaborate any further.
 
BoC Governor Carney has also said he and other officials are watching the currency and that further strength and volatility in the CAD is a significant risk to their outlook, as currency strength could act as a brake on growth. The BoC is forecasting the end of the recession in the third quarter of 2009.
 
We found that commodity currencies and the CAD in particular have been trading with historically wide ranges against the US dollar, which has likely piqued officials' interest in the currency (for more details please see Foreign Exchange Note "Surveying The Range," dated 30 Jul 2009). RBNZ officials have also said the level of the NZD "is not helping the sustainability of future growth, and brings with it additional economic risks."
 
But it appears that verbal intervention will be the primary tool for now, as Canadian officials seem a bit hesitant to plunge into actual intervention. This is akin to their introduction of a quantitative/credit easing framework and their subsequent reluctance to use it. If the BoC were to intervene, its tactic will likely be discretionary and because of the perception that extreme currency movements threaten long-term growth. But BoC studies have suggested long-term ineffectiveness of currency intervention and unilateral intervention could spur others to follow suit.
 
G10 FX
USD: Home sales data better
Investors seemed to continue the previous session's trend of profit taking amid subdued equities. US and European equity markets closed relatively flat. In Asian trading, equities were generally negative with the Nikkei down around 0.8% at the time of writing. EURUSD has hugged the 1.4400 level fairly precariously.
 
In economic data, the pending home sales index rose 3.6% m/m in June versus consensus 0.7% m/m. This was encouraging data with regard to the likelihood of a turnaround in housing, following the better than expected new home sales data. The PCE Core data showed 1.5% y/y for June, which our economists note is below the ideal pace of most Federal Reserve officials.
 
We are long a EURUSD strangle with an expiry of Sep 17. Risk sentiment continues to be a significant near-term driver as investors are just as willing to buy the buck at any hint of trouble as they are to shun it.
 
EUR, SEK: Services and Composite PMI up next
Eurozone PPI was 0.3% m/m for June versus consensus 0.2% m/m and the May estimate was revised upwards to 0%. The y/y figure was as expected at -6.6%. After several months in negative territory, the news will be greeted with some relief by ECB policymakers as the data decreases deflation risk for now.
 
A press report about continued trouble in the Baltic states put pressure on SEK early in the session.
Services and Composite PMI for the Eurozone are due and consensus is for no change on both fronts.
 
NZD: Dairy prices help NZD
A major New Zealand dairy exporter said improved demand boosted powder milk prices and was the first gain in three months, which helped boost NZDUSD late in the session.
 
Recent NZD strength has hampered domestic export profits and has raised concern among RBNZ officials.
In other developments, Australia's trade deficit contracted to A$-441 mn from A$-556mn the month prior and versus expectations of a deficit of A$-1800mn.
 
GBP: Construction PMI issues positive surprise
Construction PMI for July beat expectations of 45.0, and managed to reach 47.0, up from 44.5 in June. Up next is Services PMI, which is expected to pick up slightly to 51.8 from 51.6.
 
The BoE's MPC appears more confident of a near-term recovery but will likely want to see more evidence of a sustained growth before it considers raising policy rates. A strong result in the Services PMI would probably discourage the MPC from expanding QE.
 
We continue to hold our 6 week option basket of short GBP versus USD and EUR.
CHF: Weaker CPI
Swiss CPI for July fell faster than expected to -0.7% m/m (cons. -0.5%, prev. 0.2%). The annualised reading was also weaker at -1.2% (cons. -1.1%, prev. -1.0%).
 
The central bank will probably warn that adjusting its current intervention policy will still not be a near-term prospect as long as deflation risks remain. Rhetoric suggests that the SNB is content so far with the results of intervention but will wait until September and hope for a clearer picture on the regional and global growth outlook. We target EURCHF at 1.52 in 1m and 3m.
 

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• •Australia's ANZ Bank to buy RBS units in six Asian countries viz. Singapore, Taiwan, Indonesia, Hong Kong, the Philippines and Vietnam  for $550 mln
• •RBA kept interest rates unchanged at 3% for a fourth month
• •Fed's Tarullo said Fed is creating “enhanced“ bank surveillance program and that bank monitoring to include “market- based” indicators
• •UBS reports Q2 net loss of 1.4bn Swiss francs (est. 1.5bn francs) from 395 mln francs a year earlier
• •BNP Paribas reports its Q2 net income rising 6.6% to €1.6bn (est. €1.26 bn), compared with €1.51bn reported a year earlier
• •Australian retail sales unexpectedly fell in June; sales down 1.4% (prev +1% est.+0.5%)
• •Japan's Economics Minister Hayashi said it was too early to say Japan was in deflation because price declines were still mild when excluding food and energy.

 
Europe:
BNP Paribas, France's largest bank, reported an increase in Q2, helped by the acquisition of Fortis assets and higher investment-banking revenue. Net income rose 6.6% to €1.6bn (est. €1.26 bn), compared with €1.51bn reported a year earlier
 
UBS, Switzerland's biggest bank by assets, reported net loss of 1.4bn Swiss francs in Q2 (est. 1.5bn - franc) from 395 mln francs a year earlier
 
US:
Fed's Tarullo said Fed is creating “enhanced“ bank surveillance program and that bank monitoring to include “market- based” indicators.
 
A U.S. bank regulator is expected to move quickly in finalizing guidelines on private equity investments in failed banks, sources said. The rules could be finalized as soon as this month and could see a key measure that is being proposed for banks to be bought by private equity, the Tier 1 leverage ratio, reduced from a proposed 15% to around 10%, industry sources said.
 
Treasury said it will need to borrow $406bn through sales of marketable debt in Q3, some $109 billion less than it had forecast in April.
 
Australia & New Zealand:
RBA kept interest rates unchanged at 3% for a fourth month
 
ANZ Banking Group has agreed to pay about $550mln to buy some Asian units from RBS. The purchase will give ANZ access to 54 branches across Asia with $3.2bn in loans and $7.1bn (A$8.9bn) in deposits.
 
New Zealand wages grew at their slowest pace in almost 10 years in Q2 and the jobs market remained weak, backing views the central bank will keep interest rates on hold for some time to come. The labour cost index of private wages rose 0.3% on the previous quarter, for an annual rise of 2.6%, according to official data.
 
Australian retail sales were surprisingly weak for June as a 1.4% drop contrasted with forecasts of a 0.6% rise.
 
Australian Q2 house prices rose 4.2% from Q1, when it declined a revised 1.5%.
 
Australian Treasurer Swan announced an easing of foreign-investment rules as the nation looked to reassure investors that its door was open despite recent tensions over Chinese investment. He said the rules would be changed to effectively fast-track investments by allowing more of them to go ahead without being vetted first by the Foreign Investment Review Board (FIRB).
 
Japan:
Japanese Finance Minister Yosano said he was not concerned about recent moves in long-term interest rates, which have climbed on concern of possible rises in government bond issuance.
 
Japan's Economics Minister Hayashi said it was too early to say Japan was in deflation because price declines were still mild when excluding food and energy.
 
Asia ex Japan:
South Korea's foreign exchange reserves rose for a fifth consecutive month in July by almost $6bn on investment gains and repayment of borrowings by local banks, central bank data showed.
 
The China Banking Regulatory Commission may deem subordinated bonds issued by a bank ineligible as capital if those bonds are held by another bank, the person said. The banking regulator estimates about half the subordinated bonds in circulation are held by other banks.
 
Events (London Time):
AUS    07:30    RBA Commodity Index SDR (Jul)
NOR    08:00    PMI (Jul)
ESP    08:00    Unemployment Net (Jul)
CHE    08:15    CPI (Jul)
EMU    10:00    PPI (Jun)
USA    13:30    Core PCE Deflator (Jun)           0.1%
USA    13:30    Personal Income (Jun)             0.3%
USA    13:30    Personal Consumption (Jun)        0.4%
USA    15:00    Pending Home Sales (Jun)          0.3%
USA    22:00    ABC Consumer Confidence

 

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Posted by: Sub-Editor     

G7      Equities risk appetite retreats as renewed concerns about financial systemic risks dampen cyclical optimism; EUR weakens after FT story on IMF report (see below); Jun'09 gold rebounded by

 

$7.7 to $880.5oz on weaker USD after the Fed took further steps to improve international market liquidity; fixed income markets are rangy as big fundamental themes clash, leaving investor attention on short-term policy event risk – government supply and central bank buy-backs

 

$       The Fed announced an expansion of its fx swap arrangements with the ECB, BoJ, BoE and SNB that will enable the Fed to provide foreign exchange liquidity to US financial institutions should the need arise; the facility is approved through 30 Oct’09

 

$       The US Treasury has extended the deadline to find fund managers for the PPIP to 24 April from 10 April; the program may be opened to smaller fund managers after initial approvals

 

$       US Fed's Warsh (voter): "The panic conditions that have marked this period (2008) may also have long-run implications…I suspect that the process of an efficient reallocation of capital and labor will prove slower and more difficult than is typical after recessions"

 

€       FT: a confidential IMF report urged an easing of Eurozone entry rules, supporting “euroisation” for crisis-hit EU states in order to resolve foreign currency debt overhang and restore confidence

 

€       ECB's Bini Smaghi said outright intervention in foreign exchange markets may be warranted due to “inadequate macroeconomic or structural policies in a neighbouring country”

 

€       ECB's Stark said that the decision to increase the IMF's special drawing rights (SDRs) by $250bn was taken without full examination and amounts to “helicopter money for the globe”

 

€`      The FT launched a Eurozone house price index which showed a drop of 4.8%YoY in Q4, led by declines in Spain, Portugal, the Netherlands and Ireland; the drop was nearly as steep as the overall Europe measure (-5.4%) which includes the UK, Norway, Switzerland, Sweden, Denmark, and Iceland

 

€       Eurozone retail sales volumes fell 0.6%MoM in February versus a gain of 0.1%MoM in January, led by a drop in non-food sales (-1.1%); the annual pace fell to a series low since 1996 of -4.0% from -1.7% previously (initially -2.2%)

 

€       Eurozone producer prices fell 0.5%MoM in February, down for the seventh consecutive month, versus a revised drop of 1.1%MoM in January (initially -0.8%)

 

£       The BoE bought £2.5bn in gilts as planned versus offers of £9.1bn, yielding the highest cover ratio (3.65) since 18 March

 

¥       BoJ left the target rate at 0.1% as expected in the market and announced it would lend against a wider range of collateral that now includes privately placed municipal bonds

 

The Day Ahead

UK manufacturing production is expected to fall for the 12th consecutive month in February to post the longest streak of contraction since the recession of 1980/81. On a 3m annualized basis, manufacturing output fell 23.2% in January, the fastest decline in the series history since 1968. This highlights the rapid deterioration in global demand and cautious cash management strategies as manufacturers adjust to weaker earnings expectations; but crucially, current industrial weakness is structural as well as cyclical as the rapid collapse of global activity forces companies to write off production capacity. Out of the Eurozone, Q4 GDP is expected to be confirmed at -1.5%QoQ, the sharpest contraction in the series history since 1995.

The BoE will buy up to £158m in corporate bonds today. The UK Treasury will auction £3.0bn in 4.50% gilt due in 2019. Austria will auction €0.8bn in 10yr bonds and €0.5bn in 28yr bonds. The US Treasury will buy $6bn in 10yr TIPS.

Markets

Risk appetite retreated yesterday after displeased analysts voiced their criticism on the apparent lack of G20 consensus to “fix” the international banking system. The conceptual challenge facing the argument for fixing bank balance sheets is to look at bank solvency as a retrospective snapshot in time - a “clog” of bad assets accumulated between 2003 and 2006 - rather than a reflection of current financial and real economic activity, and its impact on both bank assets and liabilities. If this approach was adequate then it is difficult to explain how over $6trn of government bank stabilization programmes, from capital injections to bank liability guarantees and asset support - and that is just across the major Western economies (US, UK, EU) and excludes the doubling of the Fed, ECB and BoE balance sheets during this crisis, the total figure amounts to 20% of global GDP - is not be enough to cover the effects of $500-2,000bn (or $3,000bn?) of “static” toxic bank assets and end the banking and financial crises. The reality is that the interrelated dislocation in asset-backed security markets and bank funding markets represents a continuous source of financial stress that supports a drive towards building excess liquidity shock buffers and alters the rationale of financial investment decisions, with a damaging effect on the economy's money multiplier and credit flows to the real economy. Central bank quantitative easing may dampen volatility in financial liquidity and assets which is the reason for the current rebound in investor sentiment; the follow-up effects of this however depend on investor incentives and efficient market structures. With global economic activity having fallen off a cliff, “excessive” spare capacity will remain a feature of the global economy even if fiscal and monetary stimuli manage to lift G7 growth from somewhere close to -3% in 2009 to 0-1% in 2010. This equates to rising default rates and depressed profitability per unit of risk, at any level of risk-free interest rates. Hence the follow-up of QE will depend on the ability of investors to manage risk which in turn depends on credible financial policies that keep markets of systemic importance ticking. The record decline in Eurozone retail sales reported yesterday, despite the relative strength of Euro area household balance sheets compared to the US and UK consumer finances, provides a pertinent illustration of the complex psychology that drives economic behaviour. If this continues to be ignored, it will take longer than any other banking crisis of the past 20 years to repair the ability of the global economy to channel finance, capital and labour resources efficiently

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