Has Bernanke any ammunition to provide a change in sentiment? Doubtful.....


MAJOR HEADLINES – PREVIOUS SESSION

  • Canada Retail Sales at 5.4% vs -2.7% expected and -2.4% prior

  • US Dallas Fed Manufacturing Activity at -57.3% vs -50.0% expected and -50.5% prior

  • AU Jan Prelim BoP Imports at -8.0% m/m vs -2.0% prior


THEMES TO WATCH – UPCOMING SESSION

  • France Consumer Spending (0745) 

  • France Consumer Confidence (0750)

  • Swiss Q4 Non-farm payrolls (0815)

  • German IFO Business Climate (0900)

  • EU Current account Balance (0900)

  • UK BoE’s Sentance to speak (0940)

  • EU Industrial New Orders (1000)

  • UK CBI Distributive Trades Survey (1100)

  • US S&P/Case-Shiller Home Price Index (1400)

  • US Consumer Confidence (1500)

  • US Bernanke’s testimony before Senate Banking Committee (1500)

  • US Fed’s Fischer speaks (1630)

  • US Fed’s Duke speaks (1700)

Market Comment:

EUR failed to leap through the 1.30 mark yesterday as financial markets took to heart the comments from a slew of ECB and EU figures earlier in the day. The crux is that a growing number of ECB members are expressing concern that the Euro-zone situation is deteriorating rapidly. ECB’s Trichet however still maintains that the situation is not so dire and criticizes a growing “process of negative feedback” whereby both banks, the real economy and sovereign integrity are pulling each other down in a self-fulfilling spiral. Today’s Telegraph suggests that there is growing “dissent” in the ranks of the ECB with more members suggesting that zero interest rates and a wander down the path of quantitative easing may become a viable option. The article hints that all 10 ECB governors may be outright doves. The next ECB meeting on March 5th is gaining in its significance, with a growing chance of something other than the “mundane” 50bp rate cut in prospect.

GBP was given a bit of a lift during the Asian morning possibly responding to a report that UK Chancellor Darling may drop the GBP480 mln annual interest bill on a taxpayer loan by converting the GBP4 bln of preference shares into other forms of non-voting equity. In return, Lloyds Bank would be required to promise to provide billions of pounds in additional mortgage lending and loans to small businesses. The rumour, coming a day after news that Northern Rock intends to provide as much as GBP14 bln in additional mortgage loans over the next 2 years and RBS proposed plans to split the bank into 2, shave off a host of global assets and become a more UK-focused entity. Market thinks the changes are positive and a sign/hope that UK credit markets will start flowing again soon.

Fed Chief Ben Bernanke sits before the Senate Banking Committee later today in the first of his two-part semi-annual Humphrey Hawkins testimony. While these events have been occasionally contained new information and market-moving announcements in the past, most observers suggest this time round the proceedings are being overshadowed by bigger events and concerns. When it comes to Fed policy, interest rates are now out of the equation given that they are practically at zero so we expect Bernanke to dwell on the expanded TALF facility and its aims in extending credit to the consumer sector of the economy (credit cards, car-, student- and small business loans). Markets will also be on the lookout for hints that the Fed is moving closer to quantitative easing in directly buying long-term government debt direct from US Treasury. The last FOMC minutes suggested that there were as yet no immediate plans to implement this policy, though it remained under consideration. Any suggestion of a brought-forward implementation will likely be taken positively by the markets. Otherwise, the continuing negative view on the economy will continue to help the greenback higher during the risk-aversion times.

The implementation of stress tests on banks’ balance sheets by US bank regulators is scheduled for Wednesday as part of the Financial Stability Plan, and regulators issued a statement reiterating the government’s focus on financial stability and its commitment to the health of the banking system. It emphasized that major US banking institutions have capital in excess of levels regarded as “well capitalized” and the new capital buffers were aimed at ensuring banks would continue to lend even under worse economic conditions. The statement ended with a declaration of a “strong presumption that banks would remain in private hands”. This bears out the chatter yesterday that the US government’s stake in Citigroup would likely be 40% or less. In a related event, incoming Citigroup chairman Richard Parsons was reportedly seen at the White House yesterday evening, fueling talk that a final announcement on the extent of the increased ownership stake may be forthcoming as early as today.

While on the topic of stakes and bailouts, financial markets are abuzz with speculation that AIG is expected to report a quarterly loss of over $60 bln and will need to run to the authorities for further cash injections. The bailout package for AIG alone so far has been in the region of $150 bln and has seen the US government’s stake rise to about 79.9%.
Further evidence that the Asian export-oriented economic model is coming unstuck amid the global slowdown as Hong Kong reported its first annual GDP decline in six year in Q4. Official data is scheduled for release on Wednesday but a leaked source suggested it had contracted 1-2% y/y. Hong Kong now joins the ranks of South Korea, Japan, Singapore and Taiwan with negative growth, and must surely put a dampener on growth prospects for China in the future. That would not be good!