EUR a bit reluctant to participate ahead of ECB. RBA leaves rates unchanged at 3.00%. Bernanke testifying on The Hill today.

MAJOR HEADLINES – PREVIOUS SESSION

  • Australia Mar. Building Approvals out at +3.5% MoM vs. +2.8% expected
  • Australia RBA left Cash Target unchanged at 3.00% as expected
  • Switzerland Apr. SECO Consumer Climate fell to -38 vs. -25 expected and -23 in Mar.
  • Norway Apr. PMI out at 39.8 vs. 39.5 expected and 38.0 in Mar.
  • UK Apr. Construction PMI out at 38.1 vs. 31.9 expected and 30.9 in Mar.
  • EuroZone Mar. PPI out at -0.7% MoM and -3.1% YoY vs. -0.6%/-2.9% expected, respectively

THEMES TO WATCH – UPCOMING SESSION

  • US Apr. ISM Non-manufacturing (1400)
  • US Fed's Bernanke to Testify before Joint Economic Committee (1400)
  • US Fed's Stern to Speak (1715)
  • US Weekly ABC Consumer Confidence (2100)
  • UK Apr. Nationwide Consumer Confidence (2301)
  • Australia Mar. Retail Sales (0130)
  • Australia Mar. Trade Balance (0130)
  • US Fed's Yellen to Speak (0230)

Market Comment:

Equity markets started the week in an ebullient mood yesterday with huge rallies in financial stocks on the stream of speculation surrounding the stress tests of US banks and the idea that the government will not have to pump further funds into banks as the largest banks may be able to raise capital and/or the government can "simply" convert its preferred shares into common shares to take a larger stake in the banks. Despite the dilutive implications, bank stocks were up very sharply yesterday as the market seems not to be able to hear, see, speak or smell any evil at the moment. Further proof of this was found in the lack of negative reaction to the Obama administration's announcement that it is looking to close a lucrative US tax loophole that allows US multinationals to avoid taxation on foreign earnings by placing profits in offshore tax havens. This may have weighed on the greenback however, which moved sharply lower with yesterday's equity rally and as the recent reversal to the strong side in the USD index has proved a red herring so far. The USD index is now trading at its lowest level since mid March and our measure of the USD vs. the rest of the G10 currencies shows it resting on its 200-day moving average for the first time since the summer of 2008.

Nobel Laureate Krugman is casting a jaundiced eye on the economic situation as usual with his latest column over at the New York Times. While elsewhere the commentary focuses most on the risks of inflation, he points out the real evidence of declining wages and how they can trigger a deflationary spiral. This is an important point to consider: how do we get an inflationary spiral as long as wages are falling? As Krugman points out: "according to the Bureau of Labor Statistics, the average cost of employing workers in the private sector rose only two-tenths of a percent in the first quarter of this year — the lowest increase on record" He then goes on to talk about the "paradox of thrift" - how everyone attempting to become a net saver and reducer of debt can cause an economic slide. And the worst of all worlds for the US economy would be a recovery in parts of the world - say China - that triggers rising prices for basic commodities while US unemployment continues to rise and wages don't rise to compensate for rising prices. That would be a growth killing cocktail indeed.

The Swedish krona hardly bat an eye at the Riksbank minutes, which showed a dovish debate at the Riksbank's last meeting - including likely bias to cut rates to 0.25% if the situation remains bad and talk that rates would stay very low all the way until early 2011. Debt monetization was also discussed as a "natural extension" of conventional monetary policy if the interest rate mechanism can no longer give any traction. It seems the market is mostly pegging SEK to the moves in the market's risk appetite rather than worrying about the CB's assessment of the situation. 10.50 looks like a big level in EURSEK and the krona will likely need more of the same from equity markets and risk willingness if it is to punch down through that level and on towards its 200-day moving average, currently down just below 10.40. The Swedish Debt Office was also out later stating that the krona is undervalued vs. the Euro.

The EUR has been sidelined a bit in the rally in risk as traders mull Thursday's ECB meeting. Some apparently believe that the ECB has still not come to a consensus decision on what non-traditional monetary policy measures it will take to help ease the credit crunch in corporate debt markets among other issues. Stay tuned...

The US ISM Non-manufacturing data is up later today, as is testimony from Bernanke before Congress on financial stability. The ISM Non-manufacturing number is a more important indicator of the US economy's health than the manufacturing survey. It may see a bounce this month as second derivative improvement means the worsening may have slowed, but this is the survey to watch for the risk of a double dip in coming months. As for Bernanke, it will be interesting to hear the Fed chairman's impression of the situation.