Economic views and news - Monday, 31 October

ANZ Research

Monday 31st October 2011 1 Comment

OUTLOOK

CURRENCY: A night of consolidation, post Thursday’s larger than life rally. Today’s focus will again be taken from the offshore markets as the Europeans begin to breathe their new plan.

RATES: After a quiet London session rates are likely to open unchanged.

REVIEW

CURRENCY: Thursday’s rocket was subdued in Friday night’s trade as the markets consolidated. With little data out a slightly calmer market seemed to be digesting the new EU plan.

GLOBAL MARKETS: Markets took a breather after Thursday’s euphoria. Stocks were generally flat on both sides of the Atlantic but well up for the week. Solid US consumer confidence data saw risk bounce from its lows into the close. US Treasury yields were volatile, losing their earlier gains in the Europe session. Gold fell a tad and oil also fell slightly on a fall in Japanese industrial production, while other commodities generally had a quiet day.

KEY THEMES AND VIEWS

EUROPHORIA WANING? The markets’ reaction to the release of The Plan last week had more than a whiff of irrational exuberance about it, to our eyes. US 30-year bonds up 24 basis points? S&P500 up 4 percent? Perhaps Kenneth Rogoff (ex IMF Chief Economist) summed it up best: “markets are cheered that they’re still alive.”

Not surprisingly, then, cracks are starting to show in Europe’s happy face. In particular, there appears to be a lack of confidence in Italian government debt. While a scheduled bond auction went off without a hitch, bond yields continue to push higher. Ten year bond yields rose 15bps higher on Friday to trade above the 6 percent mark, closing in on their 6.19 percent peak reached back in early August (which compelled the ECB to step into the secondary market and purchase Italian bonds). Indeed, as the ECB have reduced weekly purchases since mid-August, Italian bond yields have steadily ground higher.

Will Asia ride to the rescue? It’s estimated Asia (primarily China and Japan) has bought at least half of the EFSF’s bonds so far. However, this is quite a different scenario than stumping up for a leveraged fund with much smaller guarantees.

The head of Europe’s bailout fund, Klaus Regling, this weekend found Beijing unwilling to hand over the cash until Europe could provide more concrete details on how disaster was to be averted. “We of course must wait until its structure is extremely clear,” said Chinese Vice Finance Minister Zhu Guangyao. Any Chinese cash is going to come with some pretty concrete demands regarding such issues as European criticism of China’s FX management, market-economy status for China, and Europe’s openness to Chinese investment. Japan’s Finance Minister Jun Azumi also hedged his bets, promising “necessary measures in a timely fashion” as “a stable Europe will be in the interest of our nation.”

OTHER EVENTS AND QUOTES
• US consumer confidence up. University of Michigan consumer confidence for October was revised up from the initial estimate of 57.5 to 60.9, beating market expectations (58). Stock market gains and falls in petrol prices are likely behind the rise.
• “Do you want to see another Afghanistan?” Syrian President Bashar al-Assad warns ahead of an Arab League meeting against foreign intervention in Syria.

NZDUSD: Toppy
It was the calm after the storm that the NZD needed to remain somewhat sane. The failure to break above the 0.8250 mark has sent the NZD back towards the 0.82 cent level to close the week. Top-side attempts are possible this morning with a push through 0.8250 needed for the advance to continue.
Expected range: 0.8160 – 0.8250

NZDAUD: Wedged in
Lower highs and higher lows form the base for a break out. The RBA tomorrow could be the catalyst. Until then expect the range to remain subdued with NZD and AUD moving in tandem with no market-moving data.
Expected range: 0.7640 – 0.7684

NZDEUR: Less shine
Heavy resistance on the top side should see northern moves in this cross restrained to 0.5817 today. With an EU that is likely to wince at the taste of its ‘voluntary’ medicine and talks beginning around “is it enough” we could see a move towards that resistance.
Expected range: 0.5758 – 0.5817

NZDJPY: Won the battle, but the war?
A tighter range as the safe haven vs. the risky asset battle continued overnight. Some ground was taken back by the JPY after the rally on Thursday evening left the cross in not recently chartered territory. Downside moves today are likely, however passive they may be.
Expected range: 61.80 – 62.29

NZDGBP: Rest and relaxation…
The NZDGBP cross also had an evening of rest and consolidation, sticking to a tight range. The NZDGBP should see range trading persist in our trading day, with nothing from NZ to overly excite. Again offshore markets will drive any major moves now the RBNZ is behind us for the time being.
Expected range: 0.5065 – 0.5108

Comments from our readers

On 31 October 2011 at 10:24 am Siena said:

Kiaora. Most EU policy efforts to date have been in the pursuit of crisis control and mitigation. This "Euphoria" is but a fleeting sensation - One of the ultimate causes of the crisis resided in the functioning of the financial markets as well as in macroeconomic developments. A list of contributing factors also, included the development of complex – and poorly supervised – financial products and excessive short-term risk-taking. Chinese Vice Finance Minister Zhu Guangyao, is definitely espousing a very cautious approach...No money until and is requiring that a substantive regulatory framework be strengthened. "The Proof of the Pudding is in the Eating." Crisis prevention policies should tackle these deficiencies in order to avoid repetition in the future.