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USD and JPY flail for support after Fed cut and FDIC announcement of troubled mortgage aid. US Q3 GDP estimate on tap.
Rally in risk appetite could extend a bit, but new trading range likely to develop soon. BoJ to cut tonight?
MAJOR HEADLINES – PREVIOUS SESSION
US FOMC cut rates the Fed Funds Rate 50 bps to 1.00% as expected
New Zealand Oct. NBNZ Business Confidence fell to -42.3 vs. 1.6 in Sep.
UK Oct. Nationwide House Prices fell -14.6% vs. -14.7% expected
Market Comment:
The USD was pummeled for sharp losses overnight as a market that was apparently overly long the USD rushed for the exits across the board once 1.3000 gave way in EURUSD. The JPY was also weak and EURJPY has consolidated as much as much as 17 big figures from the lows just four trading days ago. The general trigger for the move has been a resilient equity market and signs of risk appetite elsewhere as well. The Fed cut rates 50 bps to 1.00% as expected and Bernanke even indicated that the Fed was willing to cut even further if conditions warranted.
In currency land, EM currencies saw some relief with the Fed's opening of swap facilities to extend Korea, Brazil, Mexico and Singapore some needed relief on USD funding pressures. Possibly adding to the positive vibes yesterday was news of a new effort by the US Treasury and FDIC to employ $500 billion to slow foreclosures on homes by helping those holding troubled mortgages.
Blanchflower singing the blues and whither GBPUSD?
The Bank of England's dove Blanchflower - who must have a hard time not saying "I told you so" from every high spot - was out arguing that rates must come down more quickly as England risks moving into a deflation. This was the guy that turned dovish and warned of severe troubles ahead while every other Bank of England member seemed to focus on the inflation issue to the exclusion of everything else. Chancellor Darling was also out yesterday signaling to the Bank that he would welcome further cuts and not be especially worried about inflation targeting by the bank in the shorter/medium term. The BOE is expected to cut another 50 basis points at their meeting next week and the overnight rate may be a full 100 bps lower by the end of the year with two meeting remaining. Blanchflower would probably like to have it 200 bps lower, but this is unlikely. The GBP has rallied furiously over the last few days, likely mostly due to the bout of risk appetite and extraordinary market positioning. The market simply got too short sterling, and we're seeing a big short squeeze here - the disastrous UK story is all too evident for everyone to see and will continue, but markets often get ahead of themselves. Looking at technical levels in GBPUSD, 1.6790 was the old low and 1.7000 was a structural level that stretches a few years back. But to give an idea of how far we have come, consider that the 55-day moving average is up at 1.7675 still and the 200-day at 1.9180. We would expect the rally to fade eventually - those looking to enter structural short positions might consider shorting call options on rallies, considering the still very rich premium. 1-month vols are still above 25% and 1-week even higher.
NOK and CAD
Norway's central bank cut 50 bps as the majority of analysts expected. At first, this triggered a bit of NOK appreciation, but later the pair rose again, a bit of a curious development considering the generally risk willing atmosphere elsewhere (lately one would normally associate this with a stronger NOK) and the giant rise in oil prices had. So we can't give the NOK the all clear by any means - though a few minutes after writing this we see Norway coming in and bidding up the NOK to the tune of 10 big figures of downside in EURNOK - a sign of desperately thin liquidity... CAD on the other hand, responded very strongly to the rise in energy prices yesterday. In the bigger picture, although the Canadian economy faces stark difficulties ahead, especially if commodities continue their recent collapse, it has the healthiest fiscal position of any of the G7 countries with the possible exception of Switzerland, so any future USDCAD rally is unlikely to unfold with the same vigor as the one we have seen recently from 1.0350 to 1.3000 unless we move into another all-out panic phase at some time in the future. That said, we would look for support soon in USDCAD, as the pair may carve out a new range. Knife catchers are welcome to go long here below 1.1925, though one may want to wait for a technical recovery sign first as there is still plenty of room for further downside in the short term without threatening the overall rally.
What next?
So, we have a big countertrend rally on here - the question becomes how much more? Our guess is that while it could go a bit further, the markets may begin to carve out a new trading range soon. Find the Fibo's and the round numbers on your favorite cross for spots where resistance may come in. The high in EURUSD overnight, for example, stopped right at the 0.382 Fibo for the sell-off sequence from 1.4865 to 1.2332 (at 1.3293).
On the economic data front, all eyes on the first estimate of US Q3 GDP at 1230 GMT today - with the first negative reading since Q4 of 2007 expected. Q4 GDP will also inevitably be negative and we can finally put the kibosh on all of the talk about whether we have satisfied the technical definition of a recession. (which would have already been fulfilled in Q1 were we using pre-Clinton era inflation calculations)
Tonight, watch for the BoJ rate announcement - as market is now looking for a 25 bp cut after yesterday's press reports. The cut itself means little, but in a context of a rally in risk appetite, it could mean an excuse to push the JPY lower in the short term. This would only provide excellent new entry points to go long the JPY in our view if we look at the bigger picture since we don't expect a return of the carry trade any time soon...
JPY crosses recovered sharply as Asian equities fought back from new lows and on intervention risk.
Are short term highs in the USD and JPY behind us? Trichet signals rate ease next week from ECB. US Fed likely to cut 50 bps tomorrow.
MAJOR HEADLINES – PREVIOUS SESSION
• US Sep. New Home Sales rose to 464K vs. 450K expected and 452K in Aug. • Japan Sep. Retail Trade fell -0.4% YoY vs. 0.0% expected • Australia Q3 NAB Business Confidence fell to -7 vs. -8 in Q2 • Germany Nov. GfK Consumer Confidence rose to 1.9 vs. 1.5 expected and 1.8 in Oct.
The weakness in emerging markets is feeding into pronounced weakness and confidence in the export-driven Germany economy and has been a factor in the weak EUR of late. This and declining inflation threats finally had Trichet out yesterday signaling that the ECB will lower rates next week - with a 50 bp cut likely both then and possibly also in December. German 2-year rates have plummeted from over 4.50% in July to about 2.60% yesterday and appear to be on their way to the 2.00% lows from the post tech-bubble lows. But not only are German exports threatened by the emerging market crisis. European banks are also very much on the hook, having been the chief lenders to emerging markets in recent years - and that's another way we can connect EUR weakness with EM weakness. For the EUR to consolidate, we will also need to begin to see more stabilization/liquidity in the EM currencies and markets. There are a few signs of this out there, but nothing definitive thus far.
JPY crosses have seen a huge rally overnight from very depressed levels. Initially, the market seemed to thumb its nose at the idea of BoJ intervention, even after the imminent threat of such intervention was made explicit with the unplanned G-7 statement yesterday which was essentially a public green-light for Japan to intervene at will. At these levels and considering the desperate liquidity conditions in the market, the market ought to take the threat more seriously - the BoJ has enormous firepower and this isn't 2003. The rally overnight is a sign that the market is taking this threat more seriously. As well, a new naked short-selling rule was moved forward to today in Japan and has given the Nikkei some short term support (originally, the move was scheduled for Nov. 4) As JPY crosses go, so likely also will go the USD crosses, meaning that this powerful new force in the markets may finally serve to halt the seemingly unstoppable declines we have seen. If nothing else, the move will now be far more fraught with choppy two-way action even if the decline continues, as Japan is likely drawing a line in the sand here.
The countervailing force in this market to any potential moves by the BoJ and other Central Banks' intervention efforts is the strong risk of both month-end and year-end-related forced liquidation by mutual funds and hedge funds as they contend with an avalanche of redemptions. The question is to what degree speculation has entered the picture and tried to take advantage of the desperation out there. The end of the month trade is upon us this week and may be a key test for where we stand on this front. If forced liquidations of assets continue to take the upper hand then the seemingly endless vortex of declines may continue.
In any case and especially after last Friday's action, we must underline that risk has never been higher in the markets and one must tread more carefully than ever in these markets.
Mervyn King had some extremely bearish comments yesterday.
MAJOR HEADLINES
• BoE's King-UK economy likely entering recession • British economy to shrink 0.9 pct in '09-NIESR think tank • Australia Q3 CPI +5.0 PCT YR/YR vs +4.8 PCT expected • NZ puts a cap on bank deposit guarantee scheme at NZD1 mln for retail investors • BOC cuts rates by a less-than-expected 25bp
UK BOE to publish money market reform proposals (1000)
Switzerland SNB to hold briefing on Financial System (1200)
US Sep. CPI (1230)
US Weekly Initial Jobless Claims (1230)
US Aug. Net TIC Flows (1300)
US Sep. Industrial Production and Capacity Utilization (1315)
US Fed's Bullard to Speak on US Growth Potential (1330)
US Oct. Philadelphia Fed (1400)
US Weekly US Crude Oil Inventories (1500)
US Fed's Stern to Speak (1600)
US Oct. NAHB Housing Market Index (1700)
Us Fed's Rosengren to Speak (0000)
Australia Q3 Import Price Index (0030)
Japan Sep. Department Store Sales (0530)
Japan BoJ's Shirakawa to Speak (0635)
Market Comments
Another round of selling swept through the equity markets. Recent news of mutual fund and hedge fund redemptions raises worries of further liquidation pressures when liquidity is thin. (An article in FT out overnight says that $45 Billion was redeemed in September alone for hedge funds and the previous day we read of a record in mutual fund redemptions by a similar amount). So, while this may simply be a "retest of the lows" scenario for equities - and the related FX crosses that follow the "axis of risk", as long as these very large market entities face liquidation pressures the indices can go anywhere. The abovementioned FT article also points out the risk of end of year liquidation pressures from hedge funds, and this may continue as a theme or worry as Jan. 1 approaches. The only market participants that could step in here are governments who are already trying to prop up the entire financial world and those with the biggest money bags - the likes of the sovereign wealth funds. Unfortunately for them, some of their initial forays into markets saw them burned badly, so they may be unwilling to step in even at these levels.
Yesterday we talked about the shifting focus to Main Street fall-out from the banking crisis. This proved justified as the US registered the worst Retail Sales drop in 16 years (measured as three consecutive monthly drops). The falls in some discretionary categories like clothing show that the consumer has quickly begun to yank in their spending. We should worry about the October numbers as well and the general sentiment going into the Christmas shopping season in a month's time. After all, during September, the S&P500 was mostly trading between 1150 and 1250 rather than October's 850-1050.
The big news this morning in Europe was the generous Swiss rescue of UBS, with a plan to inject capital and offload $60 billion of toxic assets - this is a sweetheart deal for the bank and looks like the best of all worlds - the combination of the US and UK rescue plans - at least for the bank, if not taxpayers. The banking sector is extraordinarily important to Switzerland, so it's not surprising to see this kind of deal - the surprise is perhaps the fact that it took so long for this kind of intervention. There seem to be few implications for CHF at the moment, caught up as it is in the whole risk aversion theme, but it is nominally bullish for the franc.
In Europe, the German regional governments are complaining about being doubly exposed to the bank bailout plan - which could require some fine-tuning of the original €500 Billion plan advanced recently. In the UK, some of the banks are complaining about the harshness of the terms of Brown's plan, saying that it will cut too deeply into future earnings (have some cake and eat it, too, please....). EURGBP sways back and forth as these issues come to light - it looks like GBP could gain the upper hand if EURGBP drops below 0.7700. Watch the 200-day moving average at 0.7830 as a key resistance level.
The Scandies were waylaid by the risk aversion yesterday, and EURSEK squeezed well through 10.000 in thin evening markets. EURNOK also smashed to a new, near 10-year high just below 9.000. These have retraced sharply this morning as bargain hunters are bidding up equities on the European open.
In general, while some of the risk spreads have come in, a few of them stalled yesterday (like Libor) and over in credit-swap land, the bank credit spreads are falling, but non-financial companies' credit spreads are rocketing higher - so this is far from an across the board green light in the risk department. This and the potential liquidation issues are the most pressing themes at the moment.
Also keep an eye on the equity situation once again and tread lightly in these markets until this volatility begins to ease somewhat. The pattern of stronger USD, JPY, CHF and weaker everything else on risk aversion and vice versa on stronger risk appetite is likely to continue until this volatility fades somewhat and some more nuanced themes can develop.Read more...
Rally in risk hits a rough patch as uncertainty continues. But credit spreads are easing and must ease more for a continued renewal of risk appetite.
US September Retail Sales on tap - the credit crisis began hitting with full force in mid-September - any USD implications?
LATEST HEADLINES
US ABC Weekly Consumer Confidence out at -48 vs. -44 expected and -43 the previous week
Australia Aug. Westpac Leading Index fell -0.1%.
Japan Aug. Adjusted Current Account Total out at ¥903.2B vs. ¥1156B expected.
Japan Sep. Tokyo Condominium Sales fell -53.3% YoY vs. -38.8% in Aug.
Risk appetite clearly got ahead of itself yesterday after historic 2-day equity rally (as much as 25% in S&P500 from Friday bottom to Tuesday top!).
Most markets in Asia fell on the day, though the Nikkei managed to eke out a 1% gain
It is important for the various credit spreads to come in further for a renewed rally in risk. The US 3-month Libor vs. T-bill spread dropped 11-12 bps, but still above a week ago. 2 yr. dollar swap spreads fell sharply yesterday as bond market reopened in the US.
Theme shift: we will now have a renewed focus on the main street economy if worst part of financial crisis now behind us: US Retail Sales for September up today the first key indicator. Could be worse than expected Norges Bank looking to cut 50 bps today - as Scandies remain very weak.
USD reaction to markets continues to be: the more risk appetite, the weaker and vice versa - same as JPY and CHF.
Intel's revenue and earnings were solid yesterday - a positive sign in an otherwise ugly earnings landscape.
In Canada, elections were held yesterday and it appears that the Conservative Harper will remain in power - though still with a minority government. No apparent FX implications so far.
• US bond market closed for holiday • New Zealand Sep. QV House Prices fell -5.8% vs. -4.5% in Aug. • New Zealand Aug. Retail Sales rose 0.4% MoM and 0.8% ex Autos • China Sep. Exports rose 21.5% YoY vs. 20.0% expected • China Sep. Imports rose 21.3% YoY vs. 22.9% expected • Switzerland Sep. PPI fell -0.5% vs. -0.3% expected and rose 3.7% YoY vs. 3.9% expected
UK getting ready to put tax payers' money into banks (aka nationalization), according to Chancellor of the Exchequer, Alistair Darling.
US Fed/Treasury considering to get into the unsecured lending market (i.e.commercial paper). This has never happened in the history of the Fed and the legal basis and ramifications are unclear.
The RBA cut interest rates to 6.00% (i.e. -100 bps.). The expectation was 6.50%. ASX200 saw some support after the move (only stock index, which ended higher yesterday). AUD plummeting.
Iceland's Prime Minister says that it cannot be ruled out that they will go bankrupt.
Commodities are plummeting. Several of them were limit down in Shanghai trading. Only exception is precious metals, which are still holding the ground.
DOW dropped to (and closed) below 10,000 for the first time since 2004.
• New Zealand Q3 NZIER Business Opinion Survey rose to -19 from -64 • Australia's RBA cut rates 100 bps vs. a 50 bp cut expected • Australia Sep. AiG Performance of Construction Index fell to 31.8 vs. 43.1 in Aug. • Bank of Japan left target rate unchanged at 0.50% as expected
MARKET COMMENTS
Surely yesterday was some kind of short-term capitulation across markets: we certainly hope so, as AUDJPY was down as much as 13%+ on the day before the big bounce overnight. The RBA cut a surprise 100 bps - which really shouldn't be surprising considering the market action of late and shows more foresight than what we are seeing from the BoE and the ECB. The AUD selling was so overdone that the 100 bp cut may actually be seen as a good sign that the RBA is at least willing to do something to shore up the economy relative to other central banks (notably of the European variety), interest rate differentials aside.
Despite shifting into outright panic mode yesterday that lasted well into the North American session, signs of hope materialized into the close in the US and continued a bit overnight, with very robust bounces in equity indices (S&P500 is up some 6% from its lows of yesterday as this is being written) A chunky bounce, to the say the least, also arrived in JPY crosses - which would of course look more impressive were it not for yesterday's cliff-diving act.
The credit crunch grinds on, but the next step by the Fed is beginning to crystallize: the need to extend credit directly to institutions that desperately need to roll over their debt and can't get funding from banks, where all lending has essentially stopped. This is a lead story almost across the board and must be followed closely - as this step will be needed to prevent a total meltdown and immediate real economy effects (the longer term economic effects of all this have already been set into motion) In other words, the Fed's drastic liquidity measures are not spilling over to non-banking institutions and now they are very likely to address this problem with an unprecedented move into unsecured lending. Watch Bernanke's appearance today for a follow-up on this story. Such a move could prop up the corporate commercial paper market and the state and local government debt markets and finally start to rein in some of the credit spreads that are signalling totally frozen credit of late. If these measures are able to bring credit spreads down in the coming days, we may have room for a further relief rally in risk appetite (with usual implications for JPY and CHF) . The situation for the EUR is less clear, as the policy response has been, and may continue to be, far more difficult due to the unworkable ECB/fractured national framework.
The UK Chancellor Darling is also hatching a plan to invest government funds in banks in exchange for shares in those banks, in a program modelled after a Swedish bank rescue executed in the early 1990's.
There's also talk of a coordinated global rate cut arriving as soon as this weekend's G-7 meeting after the RBA cut 100 bps overnight. Certainly, this is a sentiment booster if it happens, and is particularly necessary in the UK and in the EuroZone. But credit markets remain the key....Read more...
• The general theme is: Credit Crisis spreading to Europe. The German government just bailed out Hypo Real Estate for EUR 50B. The Danish government has just followed with Irish example by creating a universal deposit insurance scheme covering all deposits and debt in the Danish banking system.
• The ultimate outcome is likely to be a slow-motion run on the banking systems of non-universal deposit insurance scheme countries, which will force all countries to do full coverage. In other words, the tax payers will end up with the bill anyway... as long as no new capital is alleviating the insolvency issue.
• Global indicators are showing an extreme contraction of economic activity. Global growth is still likely to be positive, but only around 2.5% vs. +4% in recent years.
• Monday, credit market spread were still widening - indicating still more contraction. Risk-willingness is on the retreat, if there is anything left at all. JPY, CHF and USD currently strongest, as Carry Trades are unwinding and the markets seeks USD liquidity.
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