How fickle are markets? Just yesterday US equities sold off hard and USD/JPY made new yearly lows. Markets were swooning after news that one US bank warned that it was looking to cut costs while another European bank said that it would move the assets of two of its funds onto its balance sheet. The S&P 500 index ended the day down over 2% and EUR/JPY finished near its lows.
General market sentiment was looking bleak until Abu Dhabi Investment Authority announced that it would invest $7.5 billion in Citigroup. Just yesterday China said that they would invest some of their foreign exchange reserves in Japanese stocks. The two announcements are provocative. It seems that foreign governments are interested in diversifying into equity markets. Furthermore, the investment in a US bank could signal a vote of confidence especially at a time when many banks are on the defensive—looking to write down their assets and cut costs. Could the moves be a signal that the worst may be over? The implication for currencies is apparent: higher equity markets are positive for the JPY carry trade, borrowing JPY to fund long investments in other currency pairs.
Looking forward, there is still a fair amount of data this week. US consumer confidence and housing data is still on tap. In Asia we are expecting Japanese inflation and retail sales, two key reports. With markets particularly sensitive to economic data look for volatility to continue.
Upcoming Economic Data Releases
- Switzerland: (4:15am ET) Month over month Producer & Import Prices expected .4% vs. previous -.3% (relevance: medium).
- Germany: (5am ET) IFO - Business Climate expected 103.3 vs. previous 103.9. IFO – Current Assessment expected 109.2 vs. previous 109.6. IFO – Expectations expected 98 vs. previous 98.6 (relevance: high).
