Concerns about German debt help temper EUR enthusiasm. Last week's 1.4050 high still out of reach


MAJOR HEADLINES – PREVIOUS SESSION

  • NZ Apr. Trade Balance out at NZ$276.0 mln vs. $250.0 mln expected and revised $447.0 mln prior

  • JP Apr. Corporate Service Price out at -2.4% y/y vs. -2.2% expected and -2.1% prior

  • NZ Q2 RBNZ 2-year Inflation Expectation out at 2.2% vs. 2.3% prior

  • SI Apr. Industrial Production out at +24.7% m/m vs. +6.3% expected and revised -15.1% prior

  • SI Apr. Industrial Production out at -0.5% y/y vs. -21.0% expected and revised -32.8% prior


THEMES TO WATCH – UPCOMING SESSION

  • GE Final Q1 GDP 9(0600)

  • GE Import Price Index (0600)

  • GE Private Consumption (0600)

  • GE GFK Consumer Confidence (0610)

  • EU Euro-zone Current Acct Balance (0800)

  • EU Industrial New Orders (0900)

  • EU ECB’s Nowotny speaks (0915)

  • US S&P/Case-Shiller House Price Index (1300)

  • US Consumer Confidence (1400)

  • US Richmond Fed Activity (1400)

  • US Dallas Fed Activity (1400)

Market Comment:

Financial markets had a quiet session yesterday, with holidays in the UK and the US tempering enthusiasm and activity. When Asia walked in this morning with rates at unchanged levels from their close, there seemed a lack of conviction to push rates in any particular direction. The USD was given some mild breathing space after the recent sell-off amid mild profit-taking and momentum took most risk-linked pairs further away from last week’s near-term highs.

However, this bout of profit-taking/retracement could only be short-lived as the US Treasury begins its latest series of debt auctions this week. A total of $162 billion of treasuries will be auctioned over the next 3 days, with $101 billion of that in two-, five- and seven-year tenors. The first tranche today is $40 billion worth of two-year notes and participation rates, and general demand, by foreigners will be tightly scrutinized to see whether recent China rumblings are a longer-term threat. Note that longer-term US yields surged to cycle highs last week on jitters about the US’ AAA rating, and the Friday sell-off could just be linked to long-weekend thin markets.

Debt as also a topic covered by Ambrose Evans-Pritchard in the UK Telegraph this morning where the headline highlights that Germany’s financial regulator has warned that the toxic debt of the country’s banks could “blow up like a grenade”. BaFin’s President, Jochen Sanio, urged local banks to make use of the government’s bad bank plans to secure “immunity” from any future downgrades of mortgage securities by ratings agencies. EUR had a bit of a wobble on this headline during Asia trading, and may push gains above last week’s 1.4050 high further out of reach near-term.

The only data release of note in Asia this morning came from New Zealand, where the RBNZ’s Q2 inflation expectations showed a modest easing to 2.2% from 2.3% in the March quarter and the 3% spike seen in Q3 2008. The survey also expected monetary conditions to become easier than neutral in the second half of this year and the first quarter of next. However, it suggested little change in interest rates, nor the OCR. The next RBNZ meeting is on June 11 and the market is currently evenly split for a further rate cut amid evident downside risks for the economy. Before that, the government will reveal its latest budget on Thursday with a background of warnings from ratings agencies that its AA+ foreign currency debt rating is under threat from a deteriorating fiscal position. Markets, and agencies, will be analyzing forecast deficits and debt levels and the growth forecasts linked to them. A more conservative budget would help soothe ratings agencies’ concerns and give the NZD a boost. Note the NZD has risen to seven-month highs against the USD (though more a feature of USD weakness) while gains against the JPY and AUD more muted.

Further pre-OPEC comments are hitting the headlines. To recap yesterday we outlined that OPEC members will be gathering in Vienna on Thursday amid a better mood and sentiment among them. Analysts are suggesting price levels are sufficiently high enough for OPEC not to consider further production cuts despite bloated inventories and still weak demand. Venezuela’s oil minister had previously commented that the cartel was aiming for oil prices around $60 p/barrel while the Saudi minister sees a pickup in demand, especially from Asia, dragging prices closer to $75 p/barrel. However, he did also caution that oil prices could rise to beyond $150 p/barrel within three years if investment to expand global capacity is not stepped up over the long-term. Short-term considerations are suggesting that there is an oversupply of production capacity, resulting in the large inventory build-up that we are currently seeing. The IEA has estimated that global upstream oil and gas investment budgets for 2009 have been slashed by 21% compared with 2008.