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Last night's market action was highly significant

Fri, Nov 21 2008, 06:05 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

Last night’s market action was highly significant, and takes us into new trading territory. The catalyst, as has been the case for the past few months, was global equity market selling, with the Dow falling below the important 8000 level. Should that index close weakly in a few hours time, we become even more confident that currency and risky asset prices will move to a much lower trading range. Overnight news was overwhelmingly bearish: the Fed’s vice chairman says the risk of deflation is now higher, the US data release on jobless claims was grim, and the ECB admits the crisis has deepened. Even safe-haven Switzerland has suffered, and cut their official interest rate by 100 bp last night.

NZD sat stubbornly just above 0.54 during our day yesterday, but once the Dow gapped lower, NZD stops were triggered, and it quickly sank to a low of 0.5275. It is currently trading at slightly under 0.53. All eyes today will be focussed on Fonterra’s noon announcement of their revised dairy farmer payout. Two year interest rates fell yesterday by 8 bp, and we expect more of the same today.

AUD was also affected by the key break in the Dow, falling to a low of 0.6160, and is poised to push lower as we write. The RBA has reached what they considered a neutral cash rate, but will continue to cut as they fear a stall in the economy, while the government will take the fiscal approach.

EUR was relatively subdued, which is a reflection of its non-high yield status, trading around the 1.25 level. JPY was more volatile, but is little changed over the past 24 hours, trading at around 0.95.

US Philly Fed factory survey down from –38 to –39 in Nov. The Philly Fed index slipped even further in November after slumping 41.3 pts in October. It is now clearly below the low-point of the 2001 recession (–37.2) and not far off the –48.2 low-point in the 1990 recession. The detail was mostly weaker, with a 7.2 pt decline to –25.2 on the jobs measure standing out in the activity components, although the most dramatic component move was the 37.9 pt collapse in the prices measure to –30.7, its lowest since the Philly Fed began this survey forty years ago.

US leading index dropped 0.8% in October, with all of that decline explained by the collapsing equity market. The other nine components were mostly offsetting, with strong rises in money supply and the yield spread, but falling building permits and consumer confidence.

US initial jobless claims surged a further 27k to 542k last week on top of the prior week’s 31k jump. The Labor Dept reported no special factors at play – other than lots of layoffs! Continuing claims also continued their rapid uptrend, rising above 4 million for the first week since the early 1980s. With the payrolls survey for November being conducted last week (ended 15/11), the surge in initial claims suggests a serious deterioration in labour market conditions since the October survey week (when initial claims were at 479k). We had a 320k payrolls drop pencilled in for November but risks are it will be an even steeper decline now.

Japanese trade balance back in the red on sharp export decline. Figures for Oct came in well under market expectations of a moderation in the Sep surplus. The balance instead dropped to a ¥63.9bn deficit for the month – a ¥159bn deterioration on Sep’s revised surplus of ¥95.1bn. Exports dropped to be down 7.7%yr, the biggest decline since 2001. Imports rose 7.4% and were the main source of the surprise vs expectations.

The Swiss National Bank cut its benchmark rate a further 100bp to 1.0%. This is the third unscheduled rate cut since October.

UK retail sales posted a 0.1% in Oct, although the detail showed that once again the result was flattered by a rise in food store sales, after a string of monthly declines from May to August. Non-food sales were down 1.1% in Oct and 1.3% in Sep, so it is clear that discretionary spending has been cut back sharply. Other UK data included accelerating M4 money supply growth in October (from 12.6% yr to 15.1% yr) which we suspect reflects liquidation of investment assets outside of M4 into cash which is in the M4 definition; and £1.4bn public sector net borrowing, the first Oct since 1994 that the public sector has run a deficit. The fiscal position ahead of Monday’s pre-budget report has deteriorated sharply.

Outlook

Our view that NZD is inherently weak in this environment is intact, with our only change being the expected trading range. Previous important support of 0.54 now becomes resistance, with the new support level being 0.50.

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Published on  Fri, Nov 21 2008, 06:08 GMT