Markets recover from Monday's turmoil but volatility continues

Today's Highlights

Markets recover from Monday's turmoil but volatility continues

NZ trade gap widens

UK retail and credit data to come.

FX Market Overview

The world is struggling to come to terms with the fact that red is the new black as far as Chinese stocks and economic data are concerned. Monday's market move was akin to cutting your arm off because you bruised your thumb; but massive over-reaction gave way to a more sedate level of nervousness yesterday. The rebound was inevitable but it didn't wipe out all the losses of the previous day. What has emerged though is a new level of nervousness amongst central bankers.

The Peoples Bank of China cutting the base interest rate by 0.25% is a bit of a Band-Aid where perhaps surgery is necessary but the relaxation of lending restrictions for Chinese banks does allow more growth as long as Chinese companies feel confident enough to borrow. And there's the rub.

The European Central Bank has hinted it will add liquidity if needs be and that may well be necessary if German exports to China are as badly hit as we suspect they might be and/or if debt problems re-emerge in Greece or become a major problem for Finland or Spain for example.

Overnight news included a surprisingly positive 1.6% rise in Australian construction work but many are calling this a lagging piece of data. Governor Stevens of the Reserve Bank of Australia also expressed worries over Australian economic growth data, saying it could be lower than previously reported. The Aussie Dollar remains around A$2.20 against the Pound; the weakest since early 2009.

We also got a report of a very negative NZ$649 million trade deficit from New Zealand. With overseas demand under pressure whilst the domestic economy is still dragging in increasing imports, the trade gap was expected to widen to something like NZ$600m. So the actual; figure was a disappointment even though some export groups actually showed growth as the weaker Kiwi Dollar make them more affordable to overseas buyers. On an interbank basis, the GBPNZD rate remains glued to the NZ$2.42 level.

Some of today's major news stories come from the UK for a change. The British Bankers Association will release lending data at 09.30BST and the CBI will release retail sector data at 10.00am. Whilst lending data may suggest growth, there is a feeling the retail data could disappoint. Obviously if that is true, the Pound may soften but anything above an index reading of 20 would be very positive for the Pound.

This afternoon brings US durable and capital goods orders data. A decline is expected in all classes of these reports and that is the problem for the US Federal Reserve. When they sit down to discuss interest rate rises, they really need to be confident growth can be sustained any negative data like this whips the rug from beneath those arguments. The USD has maintained a degree of strength throughout the last few days of turmoil but a really bad set of numbers from these reports today will undermine that so some degree.

And sometimes you just cannot win. A woman bought a bottle of brandy for the equivalent of £150 at Beijing airport but was told by the security people that she couldn't take it onto the flight. So, rather than throwing the valuable booze away, she downed the whole bottle in front of the security staff. Sadly that made her falling-down drunk in an instant and, after they carried her to a side room, the staff decided she was too inebriated to fly, so she missed her plane. They are right you know; you can't take it with you.