News and views
Risk took another dive last night, bank and corporate equities hit hard on potential downgrades. Moody’s said it is reviewing JP Morgan and Bank of America’s ratings, GE admitted it may be downgraded, and General Motors’ auditor said it may not survive. Additionally, China’s Premier Wen Jiabao said the country’s 8% growth rate target was achievable, and there may be no need to increase economic stimulus, which countered a driver of the previous day’s equities rally. The BoE and ECB both cut rates 50bp, resulting in 0.50% (lowest ever) and 1.50% cash rates respectively. BoE stated explicitly quantitative easing would start now, and earmarked £150bn for asset purchases, mainly long-end gilt (government) bonds. The ECB said there were no plans for quantitative easing. The S&P500 fell 4% at the open, and sat thereabouts all session, slipping a bit further as we write. Commodities were sold (oil and copper down 2%), gold bought 3%, as the script would dictate. US 10 year treasuries were strongly bid, down 15bp, the BoE’s bond buying program an additional driver.
NZD traced a weaker range, 0.4985 to 0.5045, and is looking weak at 0.4975. In calmer times, that range would have been considered quite volatile, and explanations for causality would be sought. Today, we see that as a quiet night in the currency.
AUD slipped into a slightly lower range overnight, from 0.6410-0.6450 to 0.6380-0.6450. As we write, it has suddenly dipped to 0.6365 on the S&P500. Yesterday’s weak building approvals come on the heels of a weak Q4 GDP, and may lead to speculation of the RBA resuming its easing track. AUD/NZD tried probing key support at 1.2750, a break of which would be significant.
EUR opened in Europe around 1.2620, and fell to 1.2480 around the ECB. It has recovered slightly to 1.2540. GBP fell in its local session from 1.4235 to 1.4040, recovering to 1.41. USD/JPY went against the trend, falling from 99.70 to 98, but pundits look for 100 to give way next week.
US Initial jobless claims remained very high at 639k in the last week of Feb, although that was a 31k improvement on the previous week’s 27-year high.
US factory orders fell 1.9%, the sixth consecutive decline. We knew that durable goods had fallen sharply, but we were surprised to see the first increase in non-durables for six months. This may partly reflect energy prices, which have stopped falling, but it also continues the theme of relative stability in data relating to the month January.
US mortgage delinquencies increased to 7.9% of all loans in 2008 Q4, up from 7% in Q3 and the highest proportion since 1972.
The European Central Bank reduced rates by 50bps to 1.50%. ECB chief Trichet said that inflation was expected to remain well below 2% in 2009 and 2010, indicating that the ECB intends to lower interest rates further. Trichet said that the ECB was researching “unconventional policies” but currently had no plans to use quantitative easing.
German retail sales fell 1.6% m/m in January, weaker than the market’s 0.2% expectation.
The Bank of England cut its official rate by another 50bp to 0.50% and announced plans for quantitative easing. The statement noted that “a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system.” The Bank may be done with interest rate reductions. Instead it announced its intention to concentrate on quantitative easing as the primary tool of monetary policy. The Bank will, initially finance £75bn of asset purchases by the issuance of central bank reserves (printing money), over three months. Some of that will be used to finance the previously-announced Asset Purchase Facility, but the majority would be used to buy medium- and long-maturity gilts in the secondary market. The Bank has been authorised to increase asset purchases up to a total of £150bn. The MPC will now vote each month on the asset purchases deemed necessary to meet the inflation target, as well as continuing to vote on the bank rate.
Outlook
The NZD is being sold as we write, and could dip further to 0.4950. We are uncomfortable calling for a stronger move down, having observed an outside-up reversal day in yesterday’s daily bar chart. These outside reversal signals are rare (the last one observed on 22 August 2008), and while not guaranteed to succeed, are one of the more reliable technical indicators available. A move, then, to 0.52 during early next week would not surprise. Tonight’s US payrolls data could be a big mover.
