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Bearish sentiment rose another notch last night

Wed, Feb 18 2009, 06:55 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank  |  View company's profile

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News and views

Bearish sentiment rose another notch last night, following the EUR pummelling during yesterday’s New Zealand/Australian afternoon session. US equities are down 4%, banks again leading the charge (-8%). While many factors are at play here, the dominant theme this week appears to be the high exposure to emerging credits (particularly emerging European) which some countries’ banking sectors have. Commodities were hit hard: WTI oil -8%, and copper -7%.
The US dollar index rose 1.3%, as the preferred destination of safe-haven flows.
US treasuries were the recipient of some of those flows, the 10 year note rallying a solid 15bp.

NZD fell with the EUR yesterday afternoon, and continued on during the European session, finding a base around 0.5060.

AUD’s made successive lows in Europe and NY, reaching the 0.6360 area.
Demonstrating AUD’s higher correlation with risk, the AUD/NZD cross weakened to around 1.2490.

EUR’s plunge started around 2pm NZT, falling 1.5 cents in minutes. The European session’s track was less pronounced, petering out at the 1.2560.area. The weak US Fed index reading and the stronger German ZEW report both had little market impact. After initially following EUR, GBP went against the trend, courtesy of a firmer-than-expected CPI, up to around 1.43 before resting at the 1.42 level. JPY has lost its safe-haven identity for now, weakening to around 92.50; perhaps the bad run of recent data, and the Finance Minister’s resignation, raising questions.

US New York Fed “Empire State” index. The first of the four regional Fed factory surveys turned sharply weaker in February to a new cycle low after the modest improvement of January. The 6-month outlook question responses showed continued deterioration. The NY Fed headline is a separate question about business conditions, not a composite of the detail, which was not quite as weak. Yes, orders were down, but shipments and jobs both posted higher (but still negative) outcomes in February. That mitigates some of the pessimism we might otherwise derive from this report. There will be another regional update from the Philadelphia Fed on Thursday and Dallas and Richmond next week. Each of those showed improvement in January relative to December too.

US Net foreign security purchases. The TIC data showed net capital inflows into the US in December on both key measures.

German ZEW analysts’ survey - economic sentiment. The 320 German analysts and economists surveyed by the ZEW were far less pessimistic about the outlook for the German/Euroland economies this month, while at the same time revealing increased concern about current economic conditions (no surprise given the 2.1% slump in Q4 GDP growth in Germany). A ZEW spokesman said that the prospect of further ECB easing, fiscal stimulus and lower energy prices were factors behind the decline in pessimism about the future.

Euroland trade balance. The December trade deficit was only modest but fullyear 2008 saw a 32.1bn trade deficit, the biggest since the euro’s introduction ten years ago. High energy prices for much of the year and slumping global trade late in the year were the main driving factors.

UK Consumer price index. UK inflation eased a tick to 3.0% yr in January, in line with Westpac’s top of the range forecast, but considerably stronger than the 2.7% yr consensus forecast. But the Dec and Jan results need to be looked at together - earlier than usual discount sales meant that Dec “stole” some of Jan’s CPI decline. Also sterling weakness boosted the prices of some imported goods. Note too the sharp fall in the RPI inflation measure, weighed down by falling mortgage rates (not included in the CPI). Many contracts and wage negotiations are based on this measure of inflation so with it now effectively at zero (and likely to turn negative) it should have a downward influence on future CPI inflation as contracts are rolled over at the new RPI rate.

Outlook

Today’s suggested range is 0.5060 to 0.5150. A corrective bounce to 0.5120 or 0.5150 would not surprise, but an attack on 0.5050 should eventuate, and then 0.50.

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Published on  Wed, Feb 18 2009, 12:23 GMT

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