Asian bourses recover from early losses after RBA decision. Is this a taster for today's sentiment?


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jan. Personal Income/Spending out at 0.4%/0.6% vs. -0.2%/+0.4% expected

  • US Jan. PCE Core out at 0.1% m/m as expected

  • US Feb. ISM Manufacturing out at 35.8 vs. 33.8 expected

  • US Feb. ISM Prices Paid out at 29 vs. 33.5 expected

  • US Jan. Construction Spending at -3.3% m/m vs. -1.5% expected and revised -2.4% prior

  • AU Current Acct. Bal at –A$6.499b vs. -A$7.35b expected and revised –A$9.498b prior

  • AU Jan. Retail Sales at +0.2% m/m vs. -0.5% m/m expected and +3.8% prior

  • AU RBA keeps rates unchanged at 3.25%


THEMES TO WATCH – UPCOMING SESSION

  • GE WPI (0700)

  • UK Construction PMI (0930)

  • Canada BOC Rate Decision (1400)

  • EU ECB’s Weber speaks (1200)

  • US Pending Home sales (1500)

  • US Fed’s Bernanke testifies (1500)

  • EU ECB’s Liikanen speaks (1530)

  • EU ECB’s Trichet speaks (1730)

  • US ABC Consumer Confidence (2200)

Market Comment:

The meltdown of the financial sector continued o/n after a weak European session on the back of HSBC’s rights offering was compounded by news that AIG suffered Q4 losses of over $61 bln and needed an additional $30 bln equity capital facility from the US government. Wall St suffered and slid to fresh 12-year lows with bearish sentiment building up on a daily basis. Economic data offered no respite as it continued to paint a gloomy picture with ISM manufacturing out at 35.8, prices paid at 29 and construction spending down 3.3% m/m. Note the employment component of the ISM fell to a record low 26.6 which does not bode well for this Friday’s non-farm payroll numbers.

The first of the central bank meetings this week provided a mild surprise for the market. The RBA decided to leave interest rates unchanged at 3.25%, relying on the recent spate of easing and fiscal stimulus to provide support for the economy. The RBA highlighted in the immediate post-announcement headlines that mortgage rates were at very low levels and that monetary policy was appropriate. Recent data releases might have favoured this stance but the market was more inclined towards a 25bp easing and as a result the AUD soared a quick 50 pips after the announcement, and continued to squeeze higher.
Bonds and interest rate futures dipped having earlier priced in a 25-30bp cut. However, RBA Gov Stevens gave no mention to the fact that this could be the end of the current easing cycle, stating that the current stance would be reconsidered at the next meeting. In a post meeting media briefing, Treasurer Swan pointed to the earlier retail sales data as a sign that the impact of government stimulus measures was being felt. The data showed a surprise 0.2% m/m rise where the market had forecast a 0.5% m/m decline. Q4 GDP data release tomorrow will either confirm or confront the validity of the RBA’s stance.

Next in line we have the Bank of Canada rate review and it is unlikely to match the RBA stance. A 50bp cut to bring official rates to 0.5% is widely expected as Canadian data continues to show a deteriorating economy. As rates approach the zero level, markets will be on guard for any comments regarding whether the BOC was considering the quantitative easing approach adopted by the US, UK, Japan and Swiss. Note in the past the BOC has made several comments that it was not in favour of moving towards a quantitative easing policy, arguing at the same time that the Canadian financial system was still functioning adequately.

The slide in Asian bourses was not as marked as that seen in Europe and US with the futures for Dow, S&P and Nasdaq all registering positives. Asia was abuzz with rumours the Japanese pension funds had been “ordered” to buy equities to ensure that the Nikkei did not fall below the 7,000 mark. Obviously, no confirmation either way and should be treated as mere rumour. Nevertheless, there is a chance that today may see a minor rebound from yesterday’s sell-off and a corresponding shift in risk appetite in FX-land.