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Rumours continued to swirl in financial markets in a violent and rapid fashion

Wed, Oct 1 2008, 06:15 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

Rumours continued to swirl in financial markets in a violent and rapid fashion. Late in the Asian session, traders openly began to speculate over a round of coordinated Central Bank cuts. Equity markets were clearly more upbeat that cool heads would prevail and the TARP would pass, and US equity markets rebounded strongly into the close. But this did not stop heightened concern over the European banking system and the EUR was massacred again, touching lows of 1.4010 for a drop of almost 3%. Wires were speculating that the HBOS/ Lloyds deal was going to be repriced. Some were suggesting that a large M&A deal may have been behind some of the flow. And to be sure, month and quarter end fix flows may also have been a factor with a UK clearer noted as a very large seller round the London fix. EUR was a very clear loser on the final day of the month.

The USD was generally better bid as US equity markets recovered a good chunk of Monday’s losses. The S&P500 is currently up 57 points (5.2%) while the Dow is up 459 points (4.6%) on expectations that the TARP will be back. USD/JPY and USD/CHF rebounded sharply, helped by better US data. USD/JPY moved in a pretty much straight line from the mid 104’s in Asia to a high of 106.50. And the stronger USD also saw both AUD and NZD sharply lower. The NZD saw a decent move lower with a low of 0.6643 in the NY session. However, this somewhat muted in comparison with the losses in AUD. London fix related selling was arguably a key driver here and closely watched journalist McCrann noted that “if conditions worsened from last night, it would be prepared to cut as much as the full 1 per cent”. The AUD slumped from a late Asia high of 0.8097 to a low of 0.7864. AUD/NZD slumped from a steady Asian 1.1900 plus to a low of 1.1790

US consumer confidence up from 58.5 to 59.8 in Sep. Consumer confidence recovered modestly further from an upwardly revised August. This was thanks to volatile but overall lower gasoline prices. It was despite further deterioration in consumer expectations re the labour market, which supports our view that Friday’s September payrolls report will reveal a steeper 125k drop in employment. Note that the survey cut-off was September 23, before the latest round of financial market turmoil reached its peak. Business confidence was also upbeat in September, at least according to the Chicago district manufacturers (56.7), who reported a steep rise in production although its sustainability may be in doubt given the softer read on new orders. Other regional surveys from New York and Milwaukee were far more pessimistic.

US house prices down 16.4% yr. Back in July, when the Freddie Mac and Fannie Mae problems were at their most critical, house prices continued to slide, with the monthly pace of slippage quickening for the first month since February. The 16% national decline over the past year reflects slumps as steep as 30% in Las Vegas, 28% in Miami and 26% in Los Angeles, but also as mild as 2% in Dallas (thank you oil) and Charlotte.

Canadian GDP growth surprised to the upside in July, jumping 0.7%, its fastest growth pace since early 2004. Mining, oil and gas extraction was a big driver but broad-based strength was evident across a range of sectors. This is a solid start to Q3 but the monthly data can be volatile. Separately, industrial product prices slipped 0.2% in August, their first monthly fall for this year, consistent with the recent turnaround in commodity prices.

Euroland inflation 3.6% yr in Sep. The flash estimate of European inflation slipped another two-tenths to be 0.5% ppts below the recent peak. We expect further falls in coming months as favourable base effects impact the headline and commodity price declines feed through to consumer prices, and this will eventually give the European Central Bank the confidence to cut interest rates. Also, German unemployment is still falling (down 29k in Sep) reflecting previous economic growth strength but the trend pace of decline has slowed.

UK consumer confidence picked up further from its July low in Sep, but remained at levels that in past cycles have been consistent with economic recession. The survey was taken between 5-14 September so it would capture lower petrol prices but not the latest round of bank failures and stock market grief.

Outlook

NZ’s Q2 GDP confirmed recession, so we wouldn’t get too upbeat despite beating consensus. AUD/NZD remains a buy on dips, targeting 1.25, where it would probably be already if active accounts weren’t ultra-cautious over the cash squeeze into quarter end.

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Published on  Wed, Oct 1 2008, 06:19 GMT