Obama's plans to create a "bad bank" and the new, new stimulus package could lift it even higher.


MAJOR HEADLINES – PREVIOUS SESSION

  • NZ RBNZ cuts OCR by 150bp to 3.5%

  • NZ Dec Trade Bal –NZD347 mln vs –NZD520 mln prior

  • JP Dec Retail Sales -2.7% y/y vs -1.6% expected, -0.9% prior


THEMES TO WATCH – UPCOMING SESSION

  • UK Nationwide House Piece Index (0700)

  • Spain Retail Sales (0800)

  • Sweden Business/Consumer Confidence (0815)

  • Denmark Unemployment (0830)

  • German unemployment change (0855)

  • EU Business Climate Index (1000)

  • EU Consumer Confidence (1000)

  • US Durable Goods Orders (1330)

  • US New Home Sales (1330)

  • US Initial Jobless Claims (1330)

Market Comment:

Downgrades to global economic forecasts were a major feature of overnight news, kicked off by a report by the Institute of International Finance, an organization of major banks, that world growth would contract by over 1% in 2009 with rich economies contracting by 2.1%. This was followed by a less-pessimistic view from the IMF, which saw world growth slowing to a virtual standstill of +0.5%, sharply down from its earlier forecast of 2.2% issued last November. Both reports were in agreement that the UK would be among the worst performing of the advanced economies, with the IMF predicting a 2.8% contraction this year.

Emerging economies were expected to provide the only source of growth this year, the IMF report went on to say, though growth rates were well below those published just 3 months ago. The forecast for China growth was revised down to 6.7% for this year but recovering to 8% in 2010. Meanwhile at the World Economic Forum in Davos, Chinese Premier Wen Jiabao set a growth target of 8% for the Chinese economy, though admitted it would be a “tall order” but necessary and could be managed through hard work. No kidding! Both estimates still look a tad optimistic in the current economic climate.

The Fed stuck largely to the markets’ script, leaving rates unchanged and again indicating that low rates were here to stay for some time. It put the option of buying longer-dated Treasuries on the back-burner and focused more on purchasing private sector credit to get money flowing through markets again, but the purchasing of longer-dated securities would be considered as necessary. The fact that the Fed stuck to the private sector assets was seen as a USD positive overnight amid suggestions that the Fed was staying away from the printing presses for now.

Conversely in New Zealand, the RBNZ was more aggressive in its rate cutting than the market had expected, slashing the OCR by a hefty 150bp to a record low of 3.5%. The accompanying statement was equally dovish, laying the path for further rate cuts, albeit at a slower pace. RBNZ governor Bollard added that the economy would probably remain in recession until mid-2009 at the earliest.
Other data today indicated that the government’s fiscal position had deteriorated significantly in the first 5 months of the fiscal year due to the slower economy and losses on investments, raising the spectre of a credit ratings downgrade in the future. Note S&P warned of a possible downgrade due to the deteriorating fiscal position 2 weeks ago. All in all, the path ahead for the Kiwi does not look favourable and opportunities to short should be considered.

Over in Japan, the BOJ’s Deputy Governor Nishimura said the Japanese economy was deteriorating significantly and expects the worsening situation to continue. Certainly the retail sector is suffering immensely with retail sales falling for the fourth consecutive month in December, slumping 2.7% y/y after a 0.9% fall in Nov and well below market expectations of a 1.6% fall.

CHART: EURCHF

EURCHF knocking on the door of resistance at 1.5200. Above sees push up to 1.5500 having formed a solid base at 1.4710-30.

EURCHF