By eToro – Default concerns hit the financial markets half way through the trading week, which put traders and their heels and pushed capital into safe haven investments. Gold, Treasuries and the dollar saw inflows and where the beneficiaries of the recent market trepidation. Despite the fear in the markets, the S&P 500 rose by 1.38% to close at 1194.37 points.
Europe is a mess
Greece’s debt insolvency moved to the forefront mid week, creating trepidation throughout the financial markets. At the heart of the issue is whether Greece will meet is fiscal targets and be able to repay its current debts. Greek 10-year bonds, hit is high of 7.6% on Thursday up to 30 basis points prior to retracing. Yields across Europe are all under pressure (with the exception of German Bunds), and the spreads across the continent will make borrowing a difficult tasks for most of the governments. The fiscal situation in Greece is headed for an IMF bailout. Not only has the long end of the interest rate curve moved out dramatically, but 2 year yields on Greece’s debt have back up nearly 80 basis points. In fact, the Greek yield curve became inverted mid week which means that it cost more to borrow in the near term (2 years) then it does to borrow for 10 years. This is a sign that investor wants out of Greek assets, and a run on the country might be in the cards. Greek debt stabilized at the end of the day on Thursday. Part of this recovery could have been the news that Greece’s first quarter budget deficit fell 40% to 4.3 billion Euros. This would suggest that thus far they are on target.
Additionally, the economic data out of Euro Zone is not helping the currency or the European equity markets, which are plagued by Greek debt issues. Germany’s February Industrial output was expected to rise 1%, but instead came in unchanged, the January increase was cut to 0.1% from 0.6%. The euro-zone also reported a 0.6% drop in February Retail Sales, the consensus had expected a flat reading. Retail sales are a solid measure of consumer demand. Consumer demand (spending) makes up the majority (in some countries 66% of GDP) and retail sales make up approximately 33% of consumer spending. GDP was also revised down to 0.00 from the initial .1% estimate of fourth quarter 2009 growth according to Eurostat, the European Union’s statistic agency. The EUR/USD has taken a beating this week, after testing resistance at the 20-day moving average late last week (near 1.36). The currency pair tested support at 1.3275, before rebounding to 1.3387.
Will the Chinese Currency Move?
Many news outlets are reporting that China could adjust its currency in the coming days. The market does suspect something is possible. Within days of postponing the Treasury’s assessment of currency market manipulation, Treasury Secretary Geithner, who was visiting India, was invited to Beijing. The 12-month NDFS are edging higher and are now near 3%. If China does not want to give the appearance of capitulating to US pressure, it seems that expectations for an imminent announcement may be misplaced. Additionally, a newly appointed adviser to the People’s Bank of China, Xia Bin, said China should resume a managed-float foreign-exchange system soon because the impact of the global financial crisis has faded. If and when China does make a small move, it will probably be inconsequential for trade and capital flows. Most of the EM countries surrounding China will potentially have a negative export effect if the Chinese currency increases in value. China will also probably continue to purchase Treasuries at the same rate. In the 12 months after the July 2005 revaluation, China’s holdings of US Treasuries still rose $74.3 billion in comparison to $103.7 billion for the 12 months before the revaluation. The next 12 months saw China’s US Treasury holdings rise by $105 billion and then the next 12 months by $58 billion.
Japan is treading water
The economic news out of Japan was fairly disappointing and failed to show improvement similar to the Tankan survey which was released last week. Japanese machinery orders fell a sharp 5.4% in February. The consensus estimates missed this by a wide margin, having expected an increase that would have offsetted the 3.7% decline in January. On a year-over-year basis, orders were off 7.1%, compared with expectations for a 2.1% increase. This report is understood as a leading indicator for capital investment and that coupled with exports were the two main supports for the economy. The risk is that the report points to a larger problem of over-capacity in Japan. Overcapacity creates downward pressure on prices, which in turn has led to the deflationary pressures that exist in Japan today. After falling early in the week, the USD/JPY has rebounded and is poised to test the 95 area.
The US Looking Solid
The Institute for Supply Management’s purchasing managers’ index for nonmanufacturing (service) increased to 55.4 in March. The March number was better than 53.0 in February and 53.5 that were expected. The business activity jumped to 60.0 from 54.8. The employment sub-index rose to 49.8 from 48.6, but remains in contraction territory. This service sector data follows the very strong manufacturing survey (59.6) released in the first week of the month. On the housing front, which has been a lager somewhat like employment, Pending Home Sales surprised to the upside. The National Association of Realtors’ index for pending sales of used homes rose by 8.2% to 97.6, according to the NAR. Economists surveyed had expected pending home sales would decline in February by 0.5%. January pending home sales was revised slightly down, to 90.2 from an originally reported level of 90.4. Home resale had fallen three consecutive times, including a 0.6% drop in February. In the retail sector, same store sales were reported at levels that were much better than the street had expected. U.S. retailers on Thursday reported strong sales gains for March, adding to evidence that consumers are feeling more confident as the economy stabilizes. Sales at stores open at least a year rose 9.1% last month, the best monthly showing since figures have been reported a decade ago.
The only thorn in the side of the US economic movement is campaign by Thomas Hoenig, president of the Kansas City Federal Reserve. In a statement during the week, Hoenig said the central bank could raise its benchmark rate target from near zero toward 1% without hampering a U.S. recovery. Mr. Hoenig has been the lone dissenter in the recent FOMC meetings, and believes that the FOMC needs to move rates to a normal level sooner rather than later.
Central Banks
During the week, the BOE, the ECB and the RBA met to determine the fate of interest rates in the UK, Europe and Australia. As expected, the BOE and ECB left interest rates unchanged. The RBA increased the benchmark Australian interest rate by 25 basis points to 4.25, citing increasing growth, and a tightening labor market. To this point, Australia created 30 thousand full time jobs, in March. The February data was revised lower, but the unemployment rate remained steady at 5.3%.
Next Week
The week begins with Housing Data out of Canada. As the Canadian economy continues to heat up, housing, which has been a lager, will be important to watch. On Tuesday, the Australia Nation Bank Business Conditions will play a big role on determining the director of AUD during the course of the week. On Wednesday, US Retail Sales and Consumer prices will take the headlines. The Beige book, released by the Federal Reserve will follow later in the day. On Thursday, Japanese Industrial Production will lead off, followed by Jobless Claims in the US and US industrial Production. On Friday, the EMU CPI and the US Consumer Sentiment could be the market movers.
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