News and views
Skepticism regarding banks hits equities. The S&P500 plunged at the opening bell, and closed down 4.3%, banks -15%, despite another earnings result, Bank of America, beating expectations. Analysts were cited questioning the sustainability of earnings and the quality of credit assets, and an unsubstantiated blogger’s claim the bank stress test results were terrible (the US Treasury later said nothing had been released) spooked the markets further. Risk aversion barometer VIX jumped 15% to 39, back to the borderline between risk loving and avoidance. Oil fell 9%, copper -5%, on the flight from risk. US 10yr treasuries clawed back yesterday’s losses, gaining by 11bp.
Risk currencies were taken down by the fall in sentiment, with model-driven trades noted. NZD fell from 0.5670 to 0.5490, accelerating the turnaround since 6 April.
AUD dropped from 0.7190 to the current 0.6950. The AUD/NZD cross struggled to sustain a move beyond 1.2700, and consolidated between there and 1.2560.
EUR weakened slightly from 1.30, before abruptly falling to 1.2890 at the NY opening, resting now at 1.2920. GBP underperformed, possibly on M&A flows (Glaxo), from 1.4750 to 1.4530 currently. JPY strengthened on Japanese asset manager flows, from around 99.00 to just under 98.00.
US leading index down 0.3% in Mar. The fall was driven mostly by building permits, supplier deliveries and equity prices, and the job market components were also weak. There was offset from the money supply and interest rate components. March was the ninth consecutive month that the leading index failed to post a rise, indeed the monthly pace of decline in Q1 this year accelerated slightly as the quarter progressed. This outcome suggests that the outlook for the US economy remains bleak, in contrast to recent talk about the “green shoots” of recovery. The coincident index also fell in March, by 0.4%, compared to larger declines earlier in the year, so the story may be better described as “slower contraction” rather than “hopeful turnaround”.
UK house prices up for third month running in April. The Rightmove index, which measures asking prices, rose 1.8% this month. Prices continued to fall on an annual basis, but at a slower pace of –7.3% yr compared to –9.0% yr in February. This index is less negative than the lender house price surveys which are based on transacted prices, and are currently running annual declines of –16% to –18% yr. Nevertheless the latest result adds to a list of less weak housing news from a range of price, lending and activity indicators for the sector, which suggests that the housing market might be finding a bottom of sorts.
Outlook
This move downwards has built momentum during the past few sessions, with the next target 0.5450. Should global equities continue to soften this week, 0.5200 is foreseeable. This morning’s immigration data is expected to show strength from returning expatriates, but is unlikely to impact the markets.
