News and views
Investors retreated from risk trades last night, the catalyst being the dayold news of Dubai World’s bond default (suggesting investor sentiment at these elevated levels is fragile). Dubai World is a state owned company with $59 billion in debt, and the ripple effect has extended to Dubai’s banks (S&P placing four on negative watch), emerging market credit default swaps, UK banks which may be exposed, and even major equities and currencies. S&P futures (US holiday) are down 2.2%, most European indices fell over 3%, and Shanghai lost 3.6% (in the second large outside down day this week). Gold nudged to a fresh high, but most commodities fared poorly, copper making a bearish outside down day. European government bonds were in demand with the US closed, 10yr EU yields moving around 10bp lower.
US dollars were in demand amid the credit concerns, the DXY up around 0.7%. EUR reversed all of its previous day’s gains, falling from 1.5150 to below 1.5000 and currently resting just above. The riskier currencies fared worst. USD/CAD moved from 1.0450 to 1.0620, and ZAR (a good emerging currency barometer) lost 2.3%, both forming bearish outside reversals. JPY stood its ground at 86.50 though, holding yesterday’s important break below 87.00.
The down-under currencies performed similarly to the rand. AUD continued its slide post yesterday’s weaker CAPEX report, falling to just under 0.9100.
NZD followed suit to 0.7130. The AUD/NZD cross firmed slightly to 1.2775 in line with the move to risk aversion.
No US data due to the Thanksgiving holiday.
Bank of Japan minutes to October 30 meeting. As this is the meeting at which the six monthly risk assessment and forecasts are discussed, there is more meat in this document than in most minutes. The Board assesses that risks to the outlook are more balanced now than six months previous – but even so, they are wary of a balance sheet led weakening of the US and European economies blowing back on Japan. What they do not see any risk of is an end to deflation on a two year horizon. This was also the meeting where the decision to withdraw from CP purchases was made, with market distorting impacts seemingly elevated in the Board’s thinking.
Eurozone Oct money supply growth decelerated further from 1.8% yr to 0.3% yr, and growth in credit to the private sector declined by 0.8% yr. Despite evidence of a bounce in industrial activity from the global trade-driven crash a year ago, it is clear that the banking system remains impaired and credit demand is very weak – key factors that will hamper European economic recovery.
German CPI fell 0.2% in November, weaker than market expectations. Higher fuel prices were more than offset by subdued price pressures elsewhere. Base effects saw annual inflation rise from 0% to 0.3%, as comparisons turn from last year’s oil price spike to the subsequent collapse.
UK CBI retail trade index saw reported sales rise from 8 to 13 in November, the highest in two years. Sales were seen as slightly below par for this time of year, as opposed to being substantially lower for most of this year. The separate quarterly survey showed a turn to net optimism (from -2 to 13) and a slower decline in employment (from -41 to -27).
Outlook
AUD/USD and NZD/USD outlook today: The smoke from the Dubai wreckage has yet to clear, so caution reins today. AUD may see some support at 0.9060. NZD’s line of defense is 0.7080, a break of which would be bearish for the medium term.
