"Risk off" inputs seem to be on the increase, but the dollar makes no headway in Asia


MAJOR HEADLINES – PREVIOUS SESSION

  • US Aug. S&P/Case-Shiller Home Price Index out at 146.0 vs. revised 144.3 prior 

  • US Aug. S&P/Case-Shiller Composite out at -11.32% y/y vs. -11.9% expected and revised -13.26% prior 

  • US Oct Consumer confidence out at 47.7 vs. 53.5 expected and revised 53.4 prior 

  • US Weekly ABC Consumer Confidence out at -51 vs. -49 expected and -50 prior

  • JP Sep. Retail trade out at -1.4% y/y vs. -1.6% expected and -1.8% prior 

  • JP Sep. Large Retailers’ Sales out at -5.6% vs. -5.9% expected and -6.8% prior 

  • AU Q3 CPI out at +1.0% q/q, +1.3% y/y vs. +0.9%/+1.2% expected and +0.5%/+1.5% prior 

  • NZ Oct. RBNZ Business Confidence out at 48.2 vs. 49.1 prior 

  • JP Oct. Small Business Confidence out at 43.4 vs. 43.5 prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE CPI (Regional) (n/a) 

  • Sweden Consumer/Manufacturing Confidence (0815)

  • Sweden Retail Sales (0830) 

  • Norway Unemployment (0900) 

  • US Weekly MBA Mortgage Applications (1000) 

  • US Durable Goods Orders (1230)

  • Norway Norges Bank Rate Announcement (1300) 

  • US New home sales (1400) 

  • US Treasury’s Feinberg to testify (1500)

Market Comments:

The USD extended its recent rebound overnight, albeit at a slower pace than Monday, and injected a tad more nervousness into market players attempting to judge whether this correction is merely another risk buying opportunity or part of a much deeper correction.

The main catalyst for the dollar’s firmness came from the US data where consumer confidence in October fell dramatically, logging in at 47.7 versus 53.5 expected and a revised 53.4 in September. This poor piece of data overshadowed a mildly improving Case-Shiller House price index and was enough to knock equity markets lower into the close. After the close, the weekly ABC consumer confidence indicator confirmed the Conference Board’s monthly data (for a change!) with a dip lower to -51 from -50.

The 2-year US auction was surprisingly well received, even with the paltry yields on offer (fixed at 1.02% vs. the 1.045% expected), with a bid/cover ratio of 3.63 (the highest since August 2007) and indirect bids amounting to 44.5% of the total. Demand for the tenor continued post-auction resulting in yields dropping below 1% and closing at 0.934%. This would imply that today’s 5-year, and tomorrow’s 7-year, auction should see strong demand and may put further pressure on yields – a natural weight for USDJPY.

Asia opened with the same felling as yesterday – risk on the back foot, the dollar firmer and equities looking soft. All eyes were on the Australian CPI data early in the session but in the end there were no fireworks. Headline data was marginally above forecast (+0.9% q/q, +1.3% y/y versus expectations of +0.8% and +1.2% respectively) though analysis of the data suggested the gains were more evenly spread across sectors with less potential for bubbles forming. In addition, the RBA’s preferred underlying inflation measures – the weighted mean and trimmed mean- both came in at +0.8% q/q, reducing the average annual change in both measures to 3.5% y/y from 3.9%.
While still above the RBA’s target 2-3% band, expectations that the RBA may be considering a 50bp rate hike next week were trimmed back and after a brief peep above 0.92, AUDUSD spent the rest of the session on a downward path, breaking 0.9125 support by lunchtime.

Even as data currently reminds us of the fragile state of the economic rebound, overnight news continued to remind us of the fragile state of the financial sector. Last weekend Capmark Financial sought bankruptcy protection amid a deteriorating commercial real estate sector and overnight it was revealed that GMAC Financial services, the traditional lender to General Motors and in the process of taking over the auto loan business of Chrysler, was in talks with the US treasury Department seeking an additional cash infusion to the company. No amounts were mentioned but note that GMAC has already received $12.5 bln of US taxpayer funds. We are inclined to believe that this will further advocate the “risk off” trade in the near-term.

The financial sector also featured in an article in the UK’s Independent. The article revealed that the UK government was considering breaking up Lloyds bank, RBS and Northern Rock and selling off parts of their business to create three new banks. With an anticipated split into “good bank/bad bank” entities, the bad bank entity would remain in state hands though the timeframe suggested is 3-5 years. Nevertheless, thoughts about the massive debt overhang in UK banks will be brought to the fore again and could pressure GBP.

Looking ahead to today’s session, the highlight for Europe will be the Norges Bank rate decision. Widely expected to follow the RBA with a 25bp rate hike, markets will be eyeing the accompanying statement for indications of concern about NOK appreciation (in a similar vein to the BOC and RBNZ). Into the US session, it’s durable goods orders and new home sales that will grab the attention, the latter likely influenced by the soon-to-expire first time buyer tax credit.