An interesting week of data ahead with major US ISM surveys and employment report on Friday.
MAJOR HEADLINES – PREVIOUS SESSION
- New Zealand Oct. Building Permits rose 11.7% MoM
- Japan Nov. Nomura/JMMA Manufacturing PMI out at 52.3 vs. 54.3 in Oct.
- Japan Oct. Industrial Production rose 2.5% MoM and fell -13.4% YoY vs. +0.5%/-15.1% expected, respectively
- Australia Oct. New Home Sales fell -6.0% MoM
- UK Nov. GfK Consumer Confidence fell to -17 vs. -11 expected and -13 in Oct.
- UK Nov. Hometrack Housing Survey rose 0.2% MoM and fell -2.9 YoY
- Japan Oct. Labor Cash Earnings fell -1.7% YoY vs. -1.9% expected and -1.6% in Sep.
- Japan Oct. Housing Starts fell -27.1% YoY vs. -33.5% expected and -37% in Sep.
- Japan Oct. Construction Orders fell -40.1% YoY vs. -14% in Sep.
- Norway Oct. Retail Sales rose 2.1% MoM vs. 0.7% expected
- UK Oct. Mortgage Approvals out at 57.3k vs. 57k expected and 56.2k in Sep.
- EuroZone Nov. CPI estimate out at +0.6% YoY vs. +0.4% expected
- Canada Oct. Industrial Product Price fell -0.3% MoM vs. +0.3% expected
- Canada Oct. Raw Materials Price Index rose 2.5% MoM vs. 3.3% expected
- Canada Sep. GDP rose +0.4% as expected, but Q3 Quarterly GDP was out at +0.4% annualized, vs. 1.0% expected
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
- US Nov. Chicago PMI (1445)
- US Nov. Milwaukee NAPM (1500)
- US Fed's Greenlee to Speak (1600)
- Australia Nov. AiG Performance of Manufacturing Index (2230)
- Australia Oct. Building Approvals (0030)
- China Nov. PMI Manufacturing (0100)
- Australia RBA Cash Target (0330)
Risk appetite is making a tepid comeback today, which is also the last day of the month and therefore subject to the usual end of month fixing moves based on realignment of portfolios due to the month's fluctuation in asset prices. This could easily cause one off swings in prices in the currency market today that don't necessarily serve as reliable technical indicators of the action to come. The US bond market moved quite a bit over the month, and equities were much higher on the month as a whole, so end of month flows may be rather heavy today into the fix.
The reality of Dubai vs. the Liquidity Rally
The ugly news from Dubai last week continues to reverberate through global markets this week. A breakdown of where we stand at the moment on the situation:
The ugly news from Dubai last week continues to reverberate through global markets this week. A breakdown of where we stand at the moment on the situation:
- Risk levels are still elevated if we glance over at emerging market currencies and equity markets. Our risk inputs for the Carry Trade Model are nearing a key threshold that represents overall expansion vs. contraction in risk appetite. USD sellers have been emboldened by the seeming stabilization, but if USD weakness is supposed to correlate with risk appetite, then the USD sell-off has been too steep already relative to other indicators
- News-wise, the UAE is moving to ease the crisis with a liquidity scheme for banks with Dubai debt. But both Abu Dhabi and the Dubai financial authorities are trying to distance themselves from Dubai World (the main culprit in the Dubai real estate hyper-bubble) and the idea that they will make good on all of Dubai World's debt.
- The question about the degree to which this event could serve as a trigger for a new global crisis is being bandied about. This question is interesting: total Dubai debt is on the order of $80 billion - a drop in the bucket compared to the bailout amounts in play elsewhere. Compare this with the Fed's promise to buy $1.25 trillion in mortgage debt. So any wider fallout will have more to do with the fear of fear itself (risk contagion brought about by a contraction in risk appetite and the implications such a move would have on asset prices and emerging market countries dependent on capital inflows) rather than the magnitude of the isolate Dubai problem.
Looking ahead
Last week's crazy action was induced by a relatively exogenous shock from Dubai and came during a holiday period in the US, which probably only served to aggravate volatility. Considering the magnitude of the reaction in the markets, it is clear how quickly the bulls are ready to sprint for the exits at the least sign of trouble and makes one wonder about the durability and conviction of the recovery cycle in asset prices. We would watch emerging market prices and currencies for signs that the market is either getting over the Dubai shock or whether worry is increasing this week. The British pound seems to be a short term proxy for Dubai worries as well, since its banks have the largest exposure to Dubai World debt.
Last week's crazy action was induced by a relatively exogenous shock from Dubai and came during a holiday period in the US, which probably only served to aggravate volatility. Considering the magnitude of the reaction in the markets, it is clear how quickly the bulls are ready to sprint for the exits at the least sign of trouble and makes one wonder about the durability and conviction of the recovery cycle in asset prices. We would watch emerging market prices and currencies for signs that the market is either getting over the Dubai shock or whether worry is increasing this week. The British pound seems to be a short term proxy for Dubai worries as well, since its banks have the largest exposure to Dubai World debt.
Meanwhile, later this week we have a look at the key US ISM reports and the chain store sales report on Thursday. There will be intense focus on the ADP employment change Wednesday and jobless claims on Thursday ahead of the actual US employment report on Friday as the market tries to gauge when the US employment trends will finally turn.
Chart: AUDUSD vs. risk and rate spreads
The RBA is very much in focus this evening ahead of the decision on the Cash Target tonight. Last week, a clear majority was looking for a 25-bp hike, but now it appears that the market is 50-50 on the prospect for a hike. AUD was in the vanguard vs. the weak USD for some time, but has now taken a bit of a back seat and fallen vs. the rest of the G-10 after matching a 20-year high recently as the RBA has failed to provide rhetoric sufficiently hawkish to see rate spreads continuing to expand in favor of the Aussie. It is clear from today's chart that the AUD direction is dependent on the RBA's guidance and its affects on rate spreads as well as the degree to which global asset markets - particularly emerging market assets - either continue to correct lower or try to reinvigorate the rally impulse. (In the chart, AUDUSD is shown in white, while the 2-year spread on Australian vs. US rates is shown in yellow, and the MSCI emerging market index is shown in red.)
The RBA is very much in focus this evening ahead of the decision on the Cash Target tonight. Last week, a clear majority was looking for a 25-bp hike, but now it appears that the market is 50-50 on the prospect for a hike. AUD was in the vanguard vs. the weak USD for some time, but has now taken a bit of a back seat and fallen vs. the rest of the G-10 after matching a 20-year high recently as the RBA has failed to provide rhetoric sufficiently hawkish to see rate spreads continuing to expand in favor of the Aussie. It is clear from today's chart that the AUD direction is dependent on the RBA's guidance and its affects on rate spreads as well as the degree to which global asset markets - particularly emerging market assets - either continue to correct lower or try to reinvigorate the rally impulse. (In the chart, AUDUSD is shown in white, while the 2-year spread on Australian vs. US rates is shown in yellow, and the MSCI emerging market index is shown in red.)
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