News and views
A broadbased short squeeze is our best explanation for the rally in risk overnight. Add to that China’s announcement yesterday of a stimulus plan, to roughly double infrastructure and manufacturing spending, as well as China’s third consecutive improvement in manufacturing PMI figures. Poor US private payrolls data were ignored, and the S&P500 gained around 2.6% until NZ’s open. S&P banks didn’t follow suit, down 7%, neither did credit spreads, as concerns regarding the financial sector linger. Most other asset classes behaved as one would expect, WTI oil up 8%, copper up 6%, and gold down 1.5%. US 10 year treasuries weakened, up 12bp in yield, and are vulnerable to a surprise from tonight’s auction announcement.
NZD’s rebound was only slightly less impressive than AUD’s, from yesterday’s 0.4985 low to NY’s 0.5075 high. The Fonterra milk powder auction result, up 16%, is in line with the mild rebound noted in food commodities this year.
AUD regained all its post-GDP losses and then some, reaching 0.6513 in New York. That’s just over 2 cents in 24 hours – flagging the extent of short-AUD positioning. A Terry McCrann article pointing to an economic storm on the horizon had no obvious impact. The AUD/NZD cross climbed off its 1.2765 low to 1.2850.
GBP’s rise from the 1.40 area to 1.4170 could be partly attributed to an unusually strong PMI services report. USD did manage to rally against one currency – JPY, reaching 99.50, shy of the 100 level where large option strikes sit.
US February non-manufacturing ISM fell to 41.6 in Feb after two months of improvement. It remains firmly in contractionary territory, although it is above last November’s low. The breakdown showed a weakening in activity and orders, consistent with other indicators suggesting the pace of economic decline has re-accelerated in February after a brief hiatus in January. The prices paid indicator rose to almost 50 as the price-depressing effect of last year’s sharp slide in gasoline prices came to an end.
US ADP Feb private payrolls showed job losses accelerating to -697k in February, consistent with official non-farm payrolls around -670k.
US corporate layoff announcements totalled 186k in Feb, fewer than January’s 242k but still 158% higher than the same month last year. There is no direct correlation with payrolls as layoffs can be announced well ahead of their taking place.
Dallas Fed President Fisher warned that the 2009 Q1 contraction could be similar to Q4 2008.
Euroland February services PMI was revised up by 0.3 pts to 39.2, still well down on January and a cycle low for the series.
UK Feb services PMI stepped up to 43.2 from 42.5 in January, the third month consecutive improvement. The low 40s reading still implies that services activity is contracting, although not at Q4’s rapid pace.
UK British Retail Consortium shop price index found a higher rate of inflation on the high street in February, probably due to the weak pound and the fact that petrol prices have stopped falling.
UK Nationwide consumer confidence index rose to 43 in February, although confidence remains low.
Outlook
This rally since last yesterday afternoon is corrective, against the larger picture downtrend. However, the speed of the rise is impressive, and points to further cleanouts of short positions, so that 0.51 is likely. On the day, 0.50 to 0.51 is suggested, with 0.51 vulnerable.
