News and views
Risk retreats. Risk aversion barometer VIX moved higher to almost 31, and the S&P500 fell 2.5%, most of that in an opening plunge. The IMF said a return to trend economic growth in the advanced economies was unlikely before late 2010, countering the more optimistic forecasts implied by US equity and rates markets. It also said the US dollar will remain the reserve currency for a long time. Further dollar supportive news came from reports the weekend’s BRIC meeting would not focus on reserve currencies. And later, a Fed spokesman said exit strategies were being given ongoing thought, keeping equities subdued. Most commodities were weaker, oil -2.5%, copper -3.6%. US 10yr treasuries were 6bp lower.
The US dollar was bid throughout the session, rising 1.3%. EUR fell from 1.3900 to 1.3755, as Eurozone employment posted its largest quarterly fall on record, -0.8%. Adding to the downbeat mood, ECB spoke of $283bn more losses by Eurozone banks by 2010, and Moody’s place UBS’s Aa2 rating on negative outlook. GBP did bounce a little to 1.6430 around London noon, but followed dollar direction to touch 1.6250. The yen showed its safe haven colours, gaining from 98.40 to 97.60.
AUD fell from 0.8050 to 0.7905, and is consolidating just above. Today’s RBA minutes were be watched for clues regarding further easing, something the market has recently thought unlikely.
NZD drifted moderately lower to 0.6280, leaving the AUD/NZD cross slightly below 1.2600.
US NY Fed index falls from –4.6 to –9.4 in June. After two months of aggressive rises, the Empire Fed index weakened somewhat, though at –9.4 the index is still 1/ stronger than in any month since September last year (except for May just gone) and 2/ weaker than in any month prior to September last year stretching back to the 2001 recession, with the exception of one-off plunges that were reversed in the following month due to the Iraq War in 2003 and the Bear Sterns near collapse in 2008. So the latest result can be interpreted as further evidence that the doom and gloom scenario for the economy that looked most plausible in the aftermath of the Lehman’s collapse, has now been pretty much discounted by respondents. But that still leaves the survey a touch weaker than where it was just prior to Lehman’s – when the economy was in recession coupled with an ongoing but not crippling credit crunch.
US net capital inflows weakened in April, to $11bn (long term) and –53bn (total), mainly due to increased buying of overseas assets by US entities, consistent with the improvement in risk appetite through the month, and the consequent depreciation in the US dollar against some currencies.
US NAHB homebuilders’ sentiment fell from 16 to 15 in June. The overhang of unsold recently-built homes continues to weigh on new home building and prices, and a sharp rise in mortgage rates in recent weeks is likely to compound the misery.
Canadian manufacturing shipments fell 0.1% in April, on top of their 3.1% March plunge, keeping in place the downtrend that began in August last year, although the steepness of that downtrend has abated somewhat, consistent with the generally less weak tone of economic data around much of the globe heading into Q2. The April result reflected a 16% jump in aerospace sales and a 19% jump in auto parts, both reversing March losses, but a 2.8% fall in ex transport sales.
Canadian auto sales were flat in April, in line with the “essentially unchanged” guidance from StatCan. That leaves sales up 8% on December’s sales pace, which was the lowest for ten years. Guidance for May was for a 1% gain.
Outlook
The move down from the 3 June 0.66 high continued last night. Today a small correction to 0.6350 is possible, before a resumption of the decline. The US dollar will be the main driver this week, in the absence of local events or data.
