UK to announce new bank bailout measures today. Japanese economic activity continues to crater, but JPY likely to remain strong.


MAJOR HEADLINES – PREVIOUS SESSION

  • UK Jan. Rightmove House Prices fell -7.3% vs. -6.3% in Dec.

  • Japan Dec. Nationwide Department Store Sales fell -9.4% YoY vs. -6.4% in Nov.


THEMES TO WATCH – UPCOMING SESSION

Events Today:

  • Switzerland Nov. Retail Sales (0815)

  • Norway Q4 Existing Homes (0900)

  • Canada Nov. International Securities Transactions (1330)

  • New Zealand Q4 Consumer Prices (2145)

  • Japan Dec. Tokyo Condominium Sales (0400)

  • Japan Dec. Consumer Confidence (0500)

Market Comment:

As discussed on Friday, the UK is moving to a new plan for bailing out banks and increasing their lending activity. The new measures would offer insurance against losses on banks' risk loans in exchange for increased government ownership and promises to lend more to customers. This package is being announced as RBS announced a GBP 20 billion loss for Q4.
This is all the inevitable outgrowth of the viciously deleveraging economy, as collapsing asset prices are eroding bank balance sheets faster than governments can throw money after them. So what are we to think of this latest bailout attempt? It is difficult to believe PM Brown's claim that the "essential problem is the resumption of lending". The essential problem is that too much lending went on in the past and now everyone realizes that they overextended themselves and have no money and owe money on deflating assets. This is a demand problem - a problem of an economic bust. There's no easy way out. As the FT's Lex said in yesterday's column: "If underlying demand for credit in the economy is weak, no amount of pushing on a string will help." Well put.

Equities staged a comeback late Friday and overnight that continues to pressure the USD and JPY ahead of the Obama inauguration tomorrow. Tomorrow really is a Big Event as there is a buzz with this inauguration like no other: the only relevant comparisons over the last 100 years are probably with the coming to office of FDR, JFK and Ronald Reagan in terms of historical importance (FDR and Reagan) and in terms of the hold that Obama seems to have on the popular imagination (as was especially the case with JFK) as we work through this massive pivot point in economic and (eventually due to all of the implications of what is unfolding) social history. The important question in the immediate future is to what degree the market is pricing in any short term expectations from tomorrow's event. Our assessment is that there is a little for the market to get its hopes up about here except for the most temporary of psychological effects, so we may be seeing a mild "buy the rumor, sell the fact" situation here - in other words, the small rally in risk that is unfolding here just before the inauguration may turn tail by midweek. This means that EURUSD and EURJPY, as the basic benchmarks, could continue their downward slide soon (see more on the EURUSD situation in Charts below). At the same time, we recognize that this is an event risk and must be willing to deal with any outcome.

The Japanese economy continues to crater. The latest data show department store sales declining at the steep rate of -9.4% on year-on-year comparisons as Japan's export economy is suffering from cratering export demand and a strong currency. The only development that will relieve Japan of the latter is renewed and sustained risk appetite that would help drive outward fund flows again.

Looking at the calendar this week, we note the following highlights in a week of very light data out of the US during its historical week:
Tomorrow: UK CPI, German ZEW, Bank of Canada rate announcement (expected to lower to 1.00%), New Zealand Retail Sales (Wed.)
Wednesday: UK BOE Minutes
Thursday: Bank of Japan Interest Rate Decision, Sweden Unemployment Rate, Canada Retail Sales, US Housing Starts and Building Permits, Bank of Canada Monetary Policy Report.
Friday: EuroZone and Germany preliminary Manufacturing and Services PMIs, UK Q4 GDP, UK Retail Sales, Canada CPI

Chart: EURUSD

EURUSD closed the week at an interesting level: almost precisely at the 0.618 retracement level for the move from the 1.2335 low to the 1.4700+ recent high. That 1.4700 recent high, in turn was a 0.618 retracement from the 1.6000+ high to the 1.2335 low, so there seems to be a focus on the Fibo levels here. As well, last week saw the pair finding support ahead of the round 1.3000 level, a break of which will be the key focus if we are to resume the downtrend. The 200-week moving average may also be a focus and comes in around 1.3375 at present.

EURUSD