Asia saw wide ranges with a short-squeeze on risk aversion trades evident; BOC, Riksbank in focus today


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Feb. Int’l Security Transactions out at C$6.107b vs. C$1.0b expected and revised C$ 10.435b prior

  • US Mar. Leading Indicators out at -0.3% vs. -0.2% expected and revised -0.2% prior

  • NZ Mar. Visitor Arrivals out at -0.5% vs. +2.9% prior

  • AU RBA Gov Stevens says Aust in recession; effect of monetary/fiscal stimulus to be felt for some time


THEMES TO WATCH – UPCOMING SESSION

  • GE Producer Prices (0600)

  • Sweden Riksbank Announcement (0730)

  • UK CPI (0830)

  • UK RPI/RPIX (0830)

  • GE ZEW Expectations Balance (0900)

  • CA Wholesale Inventories/Trade (1230)

  • US Redbook Retail Sales (1255)

  • CA BOC Rate Announcement (1300)

Market Comment:

Risk was rapidly taken off the table as yesterday progressed, with a number of factors influencing sentiment. First off, while BOA announced a return to profitability on Q1 and beating expectations, a hefty increase in bad loan provisions took the shine off the headline numbers. Then, rumours circulated that the results of the recent US bank stress tests did not make good reading. Reportedly leaked numbers (official release not expected until May 4) suggested that of the 19 biggest banks in the US, 16 were technically insolvent and of those 16 none could survive a disruption of cash flow or any further deterioration in non-performing loans. Any 2 of these banks going under would totally wipe out all remaining FDIC funding. Scary stuff but as yet these numbers are to be corroborated. This rumour naturally grabbed the headlines whereas a more optimistic one, possibly from a more reputable source, which suggested that most banks would pass the tests, did not. That may suggest the way the market prefers to play at the moment.

With risk off the table, Wall St slumped and the dollar came into its own, rising almost 0.9% on the index on the day. Prime victim of the risk aversion was the AUD, which sliced through support levels as stops were triggered with abandon, until a 3-week low of 0.6950 was printed. Another greater victim, with added pressures from elsewhere, was GBP which was also pummeled to a 3-week low below 1.45. Fears that the UK budget deficit could escalate to near GBP200 bln, according to recent economists’ forecasts, and expected downward revisions to growth in Wednesday’s budget sent the pound reeling.

EUR was also under the cosh and, while falls were not quite as numerically excessive as elsewhere, nevertheless EURUSD hit a 1-month low of 1.2887. Dovish comments from ECB member Nowotny (pessimistic about the economy, ECB missed its price stability target) although he did not necessarily agree that interest rates should go below 1%, but admitted that the ECB needed to start looking at what else it could do to turn the current situation around as it approaches the lower end of its interest rate policy.

Today’s events so far have seen the publication of the minutes of the April RBA meeting, which provided little in market-moving information, but showed that there was no compromise in opting for a 25bp rate cut rather than the 50bp the market had been hoping for. It cited a weaker near-term outlook for aggregate demand and output, a period of low capacity utilization and a weaker labour market, and its resultant impact on inflation, as reasons for a modest rate cut. In line with its post-meeting statement, the minutes showed that the RBA expected the economy to shrink in 2009 but the monetary stimulus and substantial fiscal measures to provide support for a recovery into next year.

In a speech in Adelaide, RBA Gov Stevens confirmed that Australia was in the midst of its first recession since 1991, though he saw a number of reasons to be positive about the longer-term outlook. He made no reference to possible future rate cuts but noted that the impact of past easing, together with substantial fiscal stimulus, would be felt for some time yet.

Later today, Sweden’s Riksbank and the Bank of Canada are in the spotlight with the announcement of their latest policy moves. The Riksbank is expected to announce an aggressive reduction in rates, anything between 50-100bp from the current 1% level, effectively joining the zero interest rate brigade. It is not currently felt that any kind of QE policy needs to be implemented at the moment as the mortgage market is still running efficiently. However, this would remain in reserve should deflation expectations become present in Sweden.

QE is more firmly on the agenda for the Bank of Canada. Discussion is still raging whether today’s meeting will actually implement limited QE policy, or merely lay out a framework to fall back on if things deteriorate.
Current official rates are at 0.5% and there is a risk of a minor 25bp rate cut (note only 10-12bp of easing is priced into current yields) which may give the CAD a temporary setback. Should QE be implemented, then a more serious setback could occur. Yesterday, the CAD was a victim of the flow into the USD and softer commodities, despite a better-than-expected rise in net foreign investment to C$6.11 bln in Feb.

Other data events for today include German PPI and UK CPI/RPI numbers, though these will take a backseat in relation to tomorrow’s budget, while Canada’s trade data will be overshadowed by the BOC announcement.