Geo-politics, with the North Korean missile firings, promotes caution in Asia


MAJOR HEADLINES – PREVIOUS SESSION

  • NZ Aug. Retail Sales out at +1.1% m/m vs. +0.5% expected and -0.5% prior

  • NZ Aug. Retail sales ex-Autos out at +1.2% m/m vs. +0.5% expected and revised -0.6% prior

  • UK Sep. RICS House Price Balance out at 22% vs. 15% expected and revised 10% prior

  • JP Sep. Bank Lending out at +1.7% y/y vs. +1.8% prior

  • JP Sep. M2 Money Stock out at +3.0% y/y vs. +2.9% expected and +2.8% prior

  • JP Sep. M3 Money Stock out at +2.2% y/y vs. 2.1% expected and 2.0% prior

  • AU Sep. NAB Business Conditions out at 3 vs. 4 prior

  • AU Sep. NAB Business Confidence out at 14 vs. 18 prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Swiss PPI (0715)

  • Sweden CPI (0730)

  • UK CPI/RPI (0830)

  • GE ZEW Surveys (0900)

  • EU ZEW Survey (0900)

  • EU ECB’s Tumpel-Gugerell to speak (0900)

  • EU ECB’s Honohan to speak

  • CA New housing Price Index (1230)

  • UK BOE’s Bean to speak (1300)

  • US IDB/TIPP Economic Optimism (1400)

  • US Fed’s Dudley to speak (1715)

  • US Fed’s Kohn to speak (1745)

Market Comments:

A relatively quiet o/n session in FX markets yesterday, with both the US and Canada enjoying public holidays.
The dollar spent most of the session giving back gains made early on in Asia and, with no economic data to focus on, equity markets switched attention to upcoming Q3 earnings releases and as a result the S&P closed at a new 12 month high.

As the dollar retreated, GBP was still a notable underperformer, weighed down by the CEBR interest rate and FX forecasts, while PM Brown confirmed GBP16 bln of assets to be sold, adding that to end the QE program now would imperil recovery.

Most of the action overnight was reserved for very early in the Asian session as New Zealand reported some stellar retail sales numbers for August. Sales rebounded strongly from the 0.5% decrease in July to post 1.1% m/m growth and, as an indicator that the economy is recovering strongly from recession, will likely put pressure on the RBNZ to adjust its outlook for local interest rates, at least remove its stance that further interest rate cuts may be warranted. NZD responded favourably to the data and was bought aggressively against the USD and AUD.

Australian data on the other hand was a minor disappointment. NAB’s Business Conditions index slipped one point to 3, the first slide in 4 months, while the business confidence index was a more depressing 4 points lower. The pullback mostly came from lower profitability and trading conditions but was partly offset by improvements in forward orders and employment intentions. While this data series is not expected to challenge the RBA’s recent rate hike (note tomorrow’s Westpac consumer confidence index was compiled after the rate hike), traders were faced with the unaccustomed theme of analyzing inferior data.

As the Asian morning wore on, a bias towards risk aversion was creeping in following an article in Yonhap News that North Korea will likely follow up on yesterday’s launch of five short-range missiles from its east coast with more launches from its north-west coast. It was noted the US Treasuries were better bid on the geo-political news with 10-year yields dipping some 4bp to 3.43%, though this had yet to have an impact of USDJPY levels which were hovering below 90.0 at press time.

The pound received a brief lift from the RICS house price data for September which showed UK house prices rising to their highest level in almost 2-1/2 years though RICS said the firmer prices were more a reflection of lack of supply for sale rather than aggressive buyers. The ratio of average sales to stock of unsold properties rose to 29 from 27, the highest since December 2007. In additional data, the BRC also announced that retail sales rose at their fastest pace in 5 months in September as good weather and an improving outlook for the economy boosted confidence and saw like-for-like sakes up 2.8% y/y while total sales were up 4.9% from a year earlier. However, the pound’s benefit from the data was short-lived and, in the creeping risk aversion environment, GBPUSD slid back below opening levels.

Data releases into Europe include UK CPI and RPI data, which may garner a little more attention than of late, and any surprise to the upside will help stall sterling’s slide. ZEW surveys for Germany and the EU are also on tap while Canada housing price index awaits the North American session. Not forgetting that we get the next tranche of Q3 earnings releases and this may well negate all the risk aversion plays that went on in Asia.