FT article prompts a quick slam in Asia but reverts to trading a range


MAJOR HEADLINES – PREVIOUS SESSION

  • Canada Mar. Int’l Trade Bal out at +1.1b vs. +0.5b expected

  • US Mar. Trade Balance out at -$27.6b vs. -$29.0b expected

  • UK Apr. NIESR GDP estimate out at -1.5% q/q vs. revised -1.9% q/q prior

  • UK Apr. Jobless Claims change out at 57.1k vs. 85.0k expected and revised 65.5k prior

  • UK Apr. Unemployment out at 4.7%, as expected vs. 4.5% prior

  • US ABC Consumer Confidence out at -42 vs. -43 prior

  • JP Mar. Current Acct out at +Y1.486t vs. +Y1.21t expected and +Y1.117t prior

  • JP Mar. Trade Balance out at +Y132.9b vs. +Y127.7b expected and +Y202.1b prior

  • JP Apr. M3 out at +1.7% y/y vs. +1.4% expected and +1.3% prior

  • JP Apr. Bank Lending out at +3.4% y/y vs. +3.4% prior

  • China Apr. Retail Sales out at 14.8% y/y vs. +14.5% expected and +14.7% prior

  • China Apr. Industrial Production out at +7.3% y/y vs. +8.6% expected and +8.3% prior

  • JP Apr. Eco Watchers Survey – current out at 34.2 vs. 30.0 expected and 28.4 prior


THEMES TO WATCH – UPCOMING SESSION

  • Sweden Industrial Capacity (0730)

  • UK BOE Quarterly Inflation Report (0830)

  • EU Euro-zone Industrial Production (0900)

  • Canada New Motor Vehicle Sales (1230)

  • US Import price Index (1230)

  • US Retail Sales (1230)

  • US Tres. Secretary Geithner speaks (1300)

  • US Business Inventories (1400)

Market Comment:

Ratings were very much in the headlines overnight and early in the Asian session. Fitch cut its outlook for Greece as a result of a deteriorating fiscal position while Moody’s also cut the Ukraine’s sovereign rating to B2 from B1 with a negative outlook. Meanwhile, all 3 ratings agencies commented that Australia’s AAA rating was safe for the moment despite the blowout in Australia’s budget deficit to A$58 bln, its highest in 50 years. Speculation about the US’ AAA rating surfaced after an early-morning opinion piece in the FT, written by a former head of the Government Accountability Office, suggested the AAA rating was under threat. The piece referred to a Moody’s warning nearly two years ago about ballooning healthcare and social security costs. The reference made all the more poignant by another FT article highlighting that the US Medicare fund would run out of money by 2017. The kneejerk reaction in the markets was to sell the dollar, sending the USD index to a 4-month low, although at time of writing this looks to be a temporary reaction.

China again featured on the data slate today, with retail sales and industrial production data released. April industrial data numbers confirmed the slowdown in exports reported yesterday, coming in at +7.3% y/y versus an expected +8.3% although a big reduction in power production probably accounted for a huge chunk of the shortfall. Retail sales on the other hand managed to beat forecasts, rising 14.8% y/y and potentially suggesting that the Chinese consumer is gradually helping to fill some of the void as a result of the deteriorating external situation. Looking further ahead, the FT warned that a group of US lawmakers will revive a bill that threatens to raise tariffs on Chinese goods to punish them for what they call “currency manipulation”. There have been several attempts to introduce similar currency manipulation bills over the past 4 years, none of which took hold, but the slide towards protectionist trade rules as the global economy slides deeper towards recession may give the attempt more impetus this time. Note that while US Pres. Obama was on the campaign trail he suggested that China was a currency manipulator, but his administration has now backed down from confrontation over the issue. The Treasury is legally obliged to determine every 6 months whether any country is manipulating its currency to gain an unfair trade advantage.

Japanese data today showed an above-forecast surplus on the current account in March, at Y1.4856 tln vs. Y1.21 tln expected, with a positive improvement on the income balance. The trade balance eased to Y132.9 bln as exports fell 46.5% y/y but imports tumbled by 37.8%. While the trade balance is weak, the pace of decline in exports is slowing and reduced imports are helping to offset. While on things Japanese, the BBC ran an interview with the opposition party leader Nagahara who said he was worried about the future value of the dollar and refuse to buy US bonds denominated in the USD, but any in JPY (so-called Samurai bonds) would be ok. While the story added to the negative USD sentiment following the ratings downgrade, it was afforded scant attention given the marginal chance the opposition has of winning the forthcoming election. Subsequently, newswires report that Nagahara clarified that the comments were personal and not party policy.

As an aside, latest data from the TFE showed that retail investors, the so-called Mrs Watanabe, had increased their bets against the JPY to their highest level in six months. Is the JPY carry trade back in vogue? Data showed investors held some 153,326 margin contracts which could equate to as much as $125 bln in long USDJPY positions. Further slippage in the pair may prompt the next bail-out. Low in Asia this morning was 95.80. Meanwhile, yesterday’s portfolio flows data suggested there was a lack of significant flows to drive a JPY depreciation.