News and views
Residual selling of equities, but otherwise mixed markets. The S&P500 tried to rally at the open, Obama saying equities are a good deal here, but Fed Bernanke’s speech, noting the uncertain impact of stimulus and the possibility of expanding the US$700 billion bank rescue fund, put paid to that. The index is down 0.5% as we write, similar to the Euro-Stoxx close. Credit spreads globally were slightly wider. Copper gained 6% on lower inventories. A small bounce in risk appetite pushed gold down 1% and US 10 year treasuries up 5bp. Canada cut rates 50bp to 0.50%, and spoke of future quantitative easing (as did two ECB members).
NZD followed the AUD reaction with a beta of 0.6, reaching around 0.5020, the pullback to 0.4950. All eyes now will be on the RBNZ’s move next Thursday. Swap interest rates for NZ are now below those for Australia, up to 5 year maturities, and a 75bp or 100bp cut will only pressure this swap spread lower.
AUD continued the RBA-pause inspired domestic rally to the 0.6465 area, then falling back to 0.6370 on a Mitchell article claiming the RBA has not stopped cutting rates. The RBA pause did take the AUD/NZD cross to around 1.29 during yesterday’s domestic session, and Europe held those gains, briefly flirting with 1.2940.
EUR rose and fell, to 1.2680 and 1.2520, for little net change. Option barriers at 1.2450 to 1.25 make this region sticky. GBP made multiple tests of 1.40 support, waiting above, and USD/JPY had another crack at last week’s high around 98.60.
US pending home sales slumped 7.7% in Jan, and December’s gain was revised down from 6.3% to 4.8%. Combined with last Thursday’s report of a 10% drop in new home sales, the overall housing market picture has taken another turn for the worse.
US Fed Chairman Bernanke said more needed to be done to stabilise the financial system, including aid to the banks in excess of the $700bn already approved. Bernanke reiterated his uncertainty about the impact of Obama’s stimulus package, given that households may save rather than spend any windfall.
UK construction PMI fell to 27.8 in Feb, from 34.5. This more than unwound January’s increase and provides further evidence of a new bout of economic deterioration in February.
Bank of Canada lowered the overnight rate by 50bps, citing weakerthan- expected activity in major overseas economies. The Bank is now considering its options for quantitative and/or credit easing, and will outline its strategy after the April meeting.
Outlook
The 0.50 resistance level held last night (a 20 pip breach is insignificant), and today should be quiet, with the risk of a spark from Australia’s Q4 GDP. The suggested range is 0.4920 to 0.5020. Later this week, the BoE and ECB are expected to cut rates, which could pressure EUR down, and in turn NZD.
