News and views
A bid tone to risk again last night, US equities liking the latest US plan to remove toxic assets from banks’ balance sheets. Several large private sector investors said they would participate in partnership with the government. Positive US housing data added to the tone, the S&P500 up 4.5%, banks’ up 13.5%. Oil gained 4%, and copper’s +2% was also helped by China imports in February jumping 44% from January (much of it stockpiling). US treasuries only weakened 1-2bp on the move towards risk. ECB member Orphanides offered clues that EUR may join the QE club, saying monetary policy could take either a conventional or non-conventional form.
NZD moved beyond 0.5650 to reach around 0.5715, but has just dipped under 0.57. The currency will be mainly driven by global sentiment until Thursday and Friday’s important economic data releases.
AUD ground higher to 0.7030, sustaining that move at 0.7015, as carry currencies were the main beneficiaries of the positive sentiment. AUD/NZD made a new 2009 low at 1.2260, but has recovered to 1.2320.
EUR failed to breach recent highs, market chatter on option barriers at 1.3750-1.38, as well as Russia selling, keeping it in check; after 1.3738 it fell to 1.3485, but sits back around 1.36. GBP almost touched 1.4650, but is now a cent off that. USD/JPY ground higher to around 97.
US existing home sales jumped 5.1% in February, undoing January’s fall and taking sales back to within a whisker of their December level. Sales of both single-family units and multiples fell sharply in January, only to rebound just as sharply in February. The data has been volatile lately, but the overall trend has been flat since November last year, at a very subdued level. The number of houses on the market was flat at 9.7 months’ supply. The median sale price ticked up very slightly, but remained 15.5% lower than last year. Considering today’s data in the context of last week’s increases in housing starts and permits, it does seem that the US housing market has found a floor for the time being at least. However, bear in mind that this “floor” represents a miserable level of house construction and sales activity, and there has been no sign of a sustained pickup.
The US Treasury announced its intention to use $75bn to $100bn of TARP money for a two-pronged Public-Private Investment Program to clear troubled assets from banks’ balance sheets and restart the market for asset-backed securities. In the first prong, banks will auction pools of bad loans to private sector bidders. The Treasury will then provide debt capital for the purchase at a leverage ratio of 6 to 1, guaranteed by the Federal Deposit Insurance Corporation. The Treasury will also provide 50% of the equity capital for the purchase. In other words, the private sector buyer only needs to stump up one twelfth of the value of the assets. In the second prong, the Treasury will provide 50% of the equity capital and some debt financing for fund managers to buy mortgage-backed securities that were once rated AAA.
Japan business conditions continue to deteriorate. The March MoF Business Outlook Survey large-firm diffusion index for current conditions declined to -51.3 from -35.7 in December. The headline current-conditions diffusion index for large firms sank further below the neutral zero level to its weakest reading since the survey began in Jun 2004, with manufacturers to -66.0 from -44.5 and non-manufacturers to -42.6 from -30.5.
Canada’s leading index plunged a further 1.1% in February, the steepest decline since 1981. January’s decline was revised from –0.8% to –0.9%. The leading index is on a steepening trajectory consistent with severe recession, and suggests downside risk to our –2.7% pick for 2009 GDP growth.
Outlook
Yesterday we thought 0.57 would cap any price action, and so far it (approximately) has. A key indicator to watch for clues regarding the next couple of sessions is the S&P500 index, an inability to sustain a rise above 800 would point to the NZD rally nearing its end. For today’s range, 0.5630 to 0.5800 should contain action.
