Market wrap
A mild risk-averse tone permeated the London morning. Germany’s business confidence indicator disappointed, a Der Spiegel article said Greece’s budget gap could be twice earlier forecasts and the country may need an extra EUR20bn., and ECB member Coere poured cold water on the prospects of further rate cuts. IMF head Lagarde and EU chief Rompuy both warned Europe remains vulnerable. European equities closed 0.7% lower while the S&P500 is currently down 0.1% having clawed back during the NY afternoon. The CRB commodities index is down 1.0%. US 10yr treasury yields fell from 1.75% to 1.70%. Eurozone peripheral bonds were mostly relatively steady.
The US dollar index (DXY) extended its 5-day rebound. EUR fell from 1.2972 to 1.2891 in London, partly recovering in NY to 11.2937. USD/JPY extended lower to 77.81. AUD made an intraday low of 1.0387 around midday London and recovered to 1.0432. NZD similarly bottomed at 0.8184 and bounced to 0.8221. AUD/NZD bounced further off its 5-month low of 1.2575 to 1.2700, forming a technically bullish outside day in the process.
Economic wrap
US Dallas Fed factory index edges up from –1.6 to –0.9 in Sep. Another mildly negative regional Fed survey from Dallas: 5 of the last 6 readings have been sub-zero; 2011 also saw 5 sub-zero readings between May and Sep and 2010 had 3 in the third qtr. But what is interesting is that the September detail showed production up 3.6 pts to 10.0; orders up from 0.2 to 5.3 and jobs down 8.3 pts to 5.9 (still positive ie indicating slower growth not contraction). So bosses are on balance pessimistic about business conditions while they are reporting expansion in their own firms.
US Chicago Fed national activity index for Aug dropped from –0.12 to –0.87, its weakest reading since the end of the recession in mid 2009. It is not surveyed (like Dallas, Philly, etc) but based on 80 indicators of national activity so is effectively a coincident indicator. Dips to levels almost this low in April 2011 and March 2012 were sharply reversed the next month but it is worth noting that this index has not been above 0 since Feb this year - the Mar-Aug readings as a whole are the weakest since the last recession but not as weak as the readings south of –1.0 in the first few quarters of the 2008 recession.
German IFO business climate index down from 102.3 to 101.4 in Sep. In contrast to analysts’ surveys (ZEW, Sentix), the 7000 businesses surveyed by IFO downgraded both their current assessment (–0.8 pts to 110.3) and expectations (–1.0 pts to 93.2). Both components are at the levels they were at in mid 2008 when the German economy was already in recession, contracting at a –0.4% pace as it did in both Q2 and Q3 2008. This outcome adds weight to the view that German growth will no longer offset weakness elsewhere in Europe, implying greater risk of a deeper Euroland recession in H2 2012 than the shallow/stalled downturn of the past few quarters.
Market outlook
AUD and NZD Outlook: The positive impetus to markets from recent global QE appears to have expired. The local data calendars are bare today, although the RBA’s Financial Stability Review may have market-contemporary material, and there’s only German CPI and US homes sales tonight.
NZD/USD 1 day: Higher to 0.8250, unless below 0.8150 which argues for a much deeper correction.
NZD/USD 1 month: Higher, with 0.8470 the next major target (29 Feb high).
NZ 2yr swap yield 1 day: Opening today 2bp lower at 2.68%.
NZ 2yr swap yield 1 month: Lower to 2.60% as the short-term global easing effects fade.
AUD/USD 1 day: Higher to around 1.0450, unless below 1.0385 which argues for a much deeper setback.
AUD/USD 1 month: Higher towards 1.0600 (year-old trend resistance).
