Euro-zone not united when it comes to bailouts; further USD strength looks on the cards


MAJOR HEADLINES – PREVIOUS SESSION

  • US Q4 GDP revised down to -6.2% vs. -5.4% and prior estimate of -3.8%

  • US Feb Chicago PMI at 34.2 vs. 33.0 expected and 33.3 prior

  • US Feb Michigan Confidence Index at 56.3 vs. 56.0 expected and 56.2 prior

  • US Feb Milwaukee NAPM index at 29.0 vs. 32.0 expected and 33.0 prior

  • AU Feb AIG Performance of Manufacturing at 31.7 vs. 36.6 prior

  • AU Jan HIA New Home Sales at +8.3% m/m vs. revised -1.7% m/m


THEMES TO WATCH – UPCOMING SESSION

  • EU Manufacturing PMI (0900)

  • UK Manufacturing PMI (0930)

  • UK Net Consumer Credit (0930)

  • UK Mortgage Approvals (0930)

  • UK M4 Money Supply (0930)

  • EU CPI (1000)

  • Canada GDP (1330)

  • US Personal Spending/Expenditure (1330)

  • US ISM Manufacturing Survey (1500)

  • US Construction Spending (1500)

Market Comment:

The sharp downgrade to US fourth-quarter growth lent the greenback a positive tone into the month-end while equity markets tumbled lower. Poor sentiment was noted in the financial sector after Citigroup announced its deal with the US government whereby the government would convert its preferred shares into common stock, thereby increasing its stake to close to 40%. The bad news didn’t stop there, with announcements that AIG would get as much as USD30 bln in additional funds from the US government and relaxed loan terms, news that GE would cut its quarterly dividend by 68% while Fannie Mae went cap in hand to the US Treasury again for a further USD 15.2 bln after Q4 losses. On the whole, there was not much to cheer about after the second month of the year, and the overwhelming negative vibes filtered through into Asian dealings at the start of this week.

The meeting of 27 European leaders at the weekend was confronted by a plea from Hungary for a single multi-billion bailout fund for Eastern Europe at a cost of EUR190 bln in order to a further collapse of the “new” European economies and the social unrest that would surely come in its wake. The plea was rejected by the major Western EU countries who still favour a specific case-by-case approach to any bailouts. EUR has spent most of the Asian session under pressure and looks set to continue that way.

The UK financial sector was again under the spotlight, though the spotlight moved away from RBS for a change and centred on Lloyds/HBOS. Reports that Lloyds had yet to reach agreement with the UK government on its participation in the asset insurance program, and news the HBOS unit posted GBP9.9 bln worth of write-downs in 2008, sent the counter tumbling 22%. On a similar theme, weekend news suggested HSBC was to sell USD17 bln worth of shares in order to boost capital. The bank is expected to reveal the full extent of its American sub-prime unit’s losses, with $9.9 bln in goodwill write-offs and a $24 bln provision against rising bad loans. GBP has also been under pressure since the Asian open and nothing really to pull it out of the mire.

The first week of March sees a host of central bank meetings with a mixed bag in regard to the extent of interest rate cuts, if at all, will be delivered. The RBA kicks things off tomorrow and is the one with the greatest chance of delivering a no-change decision. Recent data has suggested that earlier rate cuts are having the desired effect, with mortgage applications higher and consumer sentiment stabilizing, and risks that the central bank will adopt a wait-and-see attitude on its interest rate levels. Markets are currently pricing in a 25bp cut, having moved dramatically over the last 2 weeks from a 65bp cut, though more economists are erring on the side of no-change. Watch the post-meeting statement for hints that the RBA may be near to the end of its easing cycle. Bank of Canada meets on the same day, and 50bp cuts are expected with a 35bp cut priced in. Thursday sees the ECB and its widely-telegraphed 50bp rate cut expected. Watch for the post-meeting press conference to see if Trichet remains blinkered on inflation or whether the MPC has woken up to reality and realized the dire position of the larger EU. The Bank Of England has been more pro-active and, with rates at 1%, markets are only looking for a 50bp cut. More attention will be diverted towards any details on quantitative easing after the groundwork had been laid in recent weeks.

Further on the horizon we have the US non-farm payrolls data on Friday. Further deterioration is widely expected from last month’s -598k with forecasts ranging from -650k to -750k. The spectre of uncertainty will likely put a dampener on any tendency towards risk appetite as the week unfolds and risk aversion themes look set to dominate thinking.