But gains in Asia are not uniform, broad-based. Caution might be needed


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Feb Leading Indicators out at -1.1% m/m vs. -0.9% expected and revised -0.9% m/m prior

  • US Feb Existing Home Sales out at 4.72m vs. 4.45m expected and 4.49m prior

  • US Feb Existing Home Sales out at +5.1% m/m vs. -0.9% expected and -5.3% prior


THEMES TO WATCH – UPCOMING SESSION

  • EU Euro-zone Current Account (0900)

  • EU PMI Manufacturing/Services (0900)

  • UK CPI (0930)

  • UK RPI/RPIX (0930)

  • US Fed’s Evans speaks (1000)

  • US House Price Index (1400)

  • US Richmond Fed Manufacturing Index (1400)

  • US Bernanke, Geithner to testify (1400)

  • US Fed’s Bullard speaks (1400)

  • US ABC Consumer Confidence (2200)

Market Comment:

The announcement of the full details of the latest plan from the US Treasury to purge banks’ balance sheets of toxic assets, first mentioned on February 10, was extremely well received by the markets. Wall St enjoyed its biggest one-day percentage gains since October 2008, around 7%, and risk appetite in FX markets was securely on the table. With the success of the plan hinging on private involvement, markets were cheered when several large investors announced their intention to participate in the plan. They in turn were more inclined to pledge their support once fears about retroactive taxes or Congressional hearings on executive pay in the financial sector has been soothed.

While the response to the toxic asset plan was impressive, it still remains to be seen how long it can last. Asian bourses took up the baton but failed to extend the rally to the same degree. Early gains of 2-3% petered out by lunch and we were only 1%+ early afternoon. However, a late spurt saw the index close some 3.32% higher. Despite the 18%+ seen in the Nikkei since March 10 was not enough for Japanese finance minister Yosano. He confirmed that the ban on naked short selling of stocks, which was put in place last October and due to expire at the end of this month, would be extended until the end of July. He added that stocks had not recovered enough for the government to abandon its support. Note US stock futures also saw some profit-taking from the higher closing levels yesterday. Be on guard for some retracement today if we fail to make new ground in Europe.

On the FX front, the Asian session was dominated by a hefty rally in JPY crosses with Japanese Life Insurers reportedly the main buyers. Model fund shorts were reportedly squeezed on the way up and we reached over 4-month highs in most pairs.

The WSJ picked up on a theme that was first commented on newswires last Thursday where China is reportedly open for discussions to establish a “new currency” to eventually replace the dollar as the world’s standard and reserve currency. The piece highlights an essay by PBOC governor Zhou Xiochuan proposing a sweeping overhaul of global finance in a way that would decrease the role of the US and other wealthy nations in the global economic order. The stance echoes one put forward by Russia last week in advance of the upcoming G20 meeting in April. Whilst such talk will inevitably have a detrimental effect on the greenback, it must be acknowledged that the technical and political hurdles to such a move are enormous and hence its impact on the dollar’s short-term direction muted. At the other end of the spectrum, Australian PM Kevin Rudd commented earlier today that the dollar’s position as a key reserve currency “remained unchallenged”.

Today’s string of data is focused primarily in Europe, with Euro-zone and member PMI data the major attraction. Surveys suggest economists are expecting some consolidation in the manufacturing PMI, albeit at or close to the record lows seen in February, is looks to be a major drag on the EUR’s attempts to follow other majors higher against the dollar. The UK’s focus is on inflation data and the numbers are expected to show a further retreat in inflation. The Times carries an article from the ONS which highlights that the trend for prices is lower, although falls are not constant and across the board. Nevertheless, the more recent trend is lower, according to the ONS, and we should see a period of deflation going forward.