Very powerful late-session reversal in US stocks. Will the USD and JPY continue lower?


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jan Retail Sales at +1.0% m/m vs -0.8% expected; ex-autos +0.9% m/m vs -0.4% expected

  • US Weekly Initial Jobless Claims at 623k vs 610k expected

  • US Dec Business Inventories at -1.3% vs -0.9% expected

  • NZ Dec Retail sales at -1.0% m/m vs -0.7% expected, flat prior

  • NZ Jan REINZ House sales at -28.5% vs -23.1%


THEMES TO WATCH – UPCOMING SESSION

Events Today:

  • German Prelim Q4 GDP (0700)

  • France Prelim Q4 GDP (0750)

  • Spain PPI (0800)

  • Swiss PPI (0815)

  • EU Q4 Flash GDP (1000)

  • Canada Motor Vehicle Sales (1330)

  • US Prelim Michigan Sentiment Index (1500)

Market Comment:

Markets were given a jolt in the closing stages of the North American session on reports that the Obama administration was hammering out a program to subsidize mortgages in the next battle to unlock credit markets. The new scheme reportedly has a slightly different approach in that it seeks to help homeowners before they fall into arrears on their mortgages. Current programs only kick in when borrowers are already behind on their payments. While details were scant and there was no comment from authorities, markets embraced the new approach as Wall St recouped heavy losses to finish broadly flat and the risk aversion pressures in FX markets eased significantly. The S&P 500 survived another attempt at the key 800 mark and we may need a bit more patience.

Data from Europe yesterday continued to point to severe economic slowdown across the zone, with Span’s economy shrinking at its fastest pace in 15 years. However the 1% contraction was not quite as bad as the Bank of Spain’s prediction of a 1.1% contraction. It’s the turn of Germany, Italy and France today and median forecasts are suggesting a much sharper decline than Spain. Euro-zone sovereign ratings were also a feature of a note from ratings agency Moody’s overnight, which suggested that Ireland and Spain were most at risk of a downgrade among the 18 countries that carry the agency’s AA rating. It commented that Ireland and Spain were “vulnerable”, the US and UK “resilient” and the rest, including Germany and Canada, were “resistant”. The EUR is proving to be resilient to many of these downward pressures, aided somewhat by external factors, but the 1.2700-30 level looks to become a crucial support level in the near-term.

Unlike in the US, there were no pleasant surprises in New Zealand’s retail sales data for December, which fell 1.0% m/m vs -0.7% expected and down 0.6% q/q for the 3 months. This was the fifth consecutive quarterly decline, the first time since March 1997 that such a series has been seen. All the recent NZ data releases have been pointing to further pressure on the RBNZ to cut rates again at its next meeting on March 12.

Whilst down under, the on/off situation with the passage of the latest stimulus package through parliament took a turn for the better this morning. The independent senator who opposed the bill yesterday came round today and the bill was passed. The stimulus package, at A$42 bln, is the largest ever launched in Australia and is worth about 2% of GDP in 2009 and 1.3% in 2010. The Treasury reckons that overall it will lift growth by 0.5% this year and 0.75% in 2009-10. Shortly after the announcement, ratings agency S&P commented that the stimulus package would not impact the country’s credit rating and affirmed the rating at AAA. AUD was slow to react to these developments but had a generally biddish tone into the Asian afternoon.

G7 Finance Ministers meet in Rome later today although FX is unlikely to be the main topic under discussion. Japanese finance minister said that he had no intention of bringing up currency issues at the meeting. Others have said that FX may be discussed within the broader parameters of the deteriorating global economic situation. At the last scheduled meeting in October, the G7 issued its usual broad statement, commenting that excess volatility and disorderly movements in FX have adverse implications for economic and financial stability. How true. The emergency meeting called after the Lehmans collapse mentioned “excessive volatility in the exchange rate of the Yen”. Expect there will be no mention this time (especially if you look at USDJPY ranges in the past month!). However, be careful of any reported comments made on the sidelines, they could introduce some volatility.