News and views
US equities gained for the fourth consecutive day, sending the S&P500 to a post Oct-08 high of 1026 (+1.9%), after US existing home sales jumped to the highest level in almost two years. Federal Reserve Chairman Bernanke’s comments the “global economy is beginning to emerge from recession” were also supportive. The ECRI LEI index (widely considered the best of the leading indices) continues to shock on the upside, and points to a Q3/Q4 turnaround in US activity. The state-based breakdown of US payrolls was released on Friday, and suggests the August payrolls report could positively surprise. Commodities moved in line with equities, WTI oil futures up 1.3%, and copper futures up 5.1%. US 10yr treasuries registered a strong key reversal day, yields rising 17bp to 3.57% from the Sydney close. 3mth Libor made a new low at 0.39%.
The US dollar lost ground amid the buoyed risk sentiment, down 0.5%. EUR mimicked US equities to register a fourth daily gain, to a 1.4376 overnight high, helped by consensus-beating PMI data from the Eurozone, Germany, France and Holland. AUD almost touched 0.8400, settling at 0.8350, an additional factor here being the announcement interest withholding tax on Australian government securities will be removed. NZD made a 0.6867 high, settling later at 0.6830. PM Key commented on Sunday a common currency with Australia is a “mildly sensible idea” but unlikely to become a reality. AUD/NZD made a four-month low at 1.2192, recovering to 1.2230.
Central bankers maintained a note of cautious optimism at the annual Jackson Hole symposium over the weekend. Fed Chairman Bernanke said that “prospects for a return to growth in the near term appear good”, but noted that the rebound is likely to be slow at first, and that financial markets are still under some strain. ECB President Trichet was more cautious on the sustainability of recovery, and defended against criticisms that the ECB has acted too slowly. Interestingly, there were a few papers presented which argued that central banks should act aggressively once they start tightening, and BoC Governor Carney suggested that central banks should have a mandate to use interest rates to cool asset bubbles. But it remains to be seen whether this will have any influence on the thinking of the major central banks.
US existing home sales rose 7.2% in July, well above market expectations. Sales have now risen above the ‘trough’ levels seen through much of 2008, prior to the Lehmans collapse, though they remain 28% below the boom-era peak. Foreclosures and distressed sales are still a large part of the equation, and the pace of annual decline in sale prices slowed only slightly to -15.1% in July. But the weight of evidence, from loan approvals to new building to sales, suggests that improved demand is playing a role in the housing market’s upturn.
European business surveys posted further gains in August. The manufacturing PMI for the region rose from 46.3 to 47.9, with France recording expansion while the other major economies noted a slower pace of contraction. Similarly, the services PMI rose from 45.7 to 49.5, with Germany reporting solid growth at 54.1.
Outlook
Friday’s bullish close in global risk markets should support the NZD today, with minor support at 0.6780 and resistance at 0.6880. Tactical buying of NZD on dips remains the favoured strategy, although it should be noted this rally since 8 July is ripe for a 2-3 cent correction.
