News and views
The rumours were bought, but the facts were sold: the much awaited US stimulus measures announced early this morning contained no positive surprises, but rather the expansion of an existing plan to spur lending (from US$200 billion to $1 trillion, via the Fed), and the strengthening of bank balance sheets (also to the tune of $1 trillion, via the Treasury). US equity markets had already priced in the contents, and disappointments over a lack of guaranteed inter-bank lending and no “bad bank” to absorb toxic assets resulted in US equities selling off by around 4% (banks were down 13%). Risk-aversion returned to haunt the usual suspects – WTI oil down 2%, copper -3%, and the USD +1%. Beneficiaries were gold (+2%) and 10 year US treasuries (-17bp).
NZD rose to almost 0.54 in Europe prior to the US stimulus announcement, but then collapsed to 0.5250 as the market vented its disappointment. It continues to slump as we write, at 0.52. Offshore news is the main determinant of price this week, in the absence of major domestic data.
AUD/USD similarly fell from 0.6730 to 0.6540, and is currently soft at 0.65. AUD/NZD behaved in inverse fashion, falling pre-announcement to 1.2435, but stabilised afterwards at around 1.2480.
EUR almost reached 1.31, before turning around to 1.2830. Euro-zone negative news yesterday included rumours (denied) of Russian credit defaults, and UBS’s CHF20 billion annual loss – the largest ever in Switzerland. Eurozone banks are heavily exposed to emerging European credits, particularly in Russia. GBP put in another volatile performance, 1.49 to 1.4450. JPY buying was heavy yesterday, March year end repatriation taking it back to just above 90.
US IBD/TIPP consumer optimism edges down from 45.4 to 44.6 in Feb. Consumer optimism was little changed in Feb, with weaker readings for the economic outlook and personal finances questions mostly offset by a jump in the assessment of federal policies.
US wholesale inventories down 1.4% in Dec. The steep fall in wholesale inventories in late 2008, including a downward revision to November, adds weight to our view that the stock-building contribution to Q4 GDP will be revised lower.
Treasury Secretary Tim Geithner outlined a new Financial Stability Plan, acknowledging that last year’s emergency measures “were absolutely essential, but... inadequate... not comprehensive or quick enough”. The plan could involve up to $1 trillion of funds in a new effort to restore some strength to bank balance sheets. Meanwhile, the Fed announced a new program to spur consumer and business lending, which could also involve as much a $1 trillion, up from $200mn previously announced.
Fed chairman Ben Bernanke, speaking to the House Financial Services Committee, said that he was encouraged by the market response to recently introduced credit facilities. He promised greater disclosure around the use of these facilities, and noted that they will be wound down as market conditions improve.
French industrial production down 1.8% in Dec, Italian IP down 2.5%. These national industrial production figures show yet again how factory sector output was shrinking sharply late last year across Europe as global trade collapsed.
UK data mostly weak. The RICS (surveyors) house price measure remained very soft last month, with the vast majority reporting falling prices. The sales volume measure fell to a new cycle low. The BRC retail survey showed a food price driven Jan spike, so was not really reflective of renewed consumer strength, through December’s VAT cut may have had some impact. The trade deficit narrowed in December to £7.4bn its lowest in eighteen months, due to a lift in exports, perhaps helped along by sterling weakness, and a sharp fall in imports.
Outlook
The US stimulus plan’s expectation was the main driver of risk-buying during the past three sessions. With that now out of the way, we are likely to resume the larger degree risk-aversion trends, which means carry currencies, such as NZD, should weaken further. On the day, 0.51 to 0.5250 should hold, eventually heading below.
