The Big Picture • EM concerns spilling over With little economic data to move the markets yesterday, the main focus was increasing fears about emerging markets. Tensions in Ukraine continue increase as German Chancellor Merkel reported called Russian actions in Crimea an annexation and said Russia must switch course in the region by next week or risk more sanctions. The EU will discuss harsher sanctions on 17 March, the day after a planned referendum in Crimea on whether to join Russia. Sanctions on Russia would no doubt be met with counter-sanctions. All in all they would be a negative for global trade and growth. • China is also troubling the markets. There were rumors that another Chinese solar company would announce a default. Central Bank Gov. Zhou suggested that the fluctuations in the yuan recently were within a reasonable range, which implies that the government is not perturbed by this volatility and it’s likely to persist. The Chinese rumors, while unconfirmed, affected the commodity markets and copper fell a further 3.25%, dragging the AUD down below 0.90 again with it. • AUD was the worst-performing G10 currency overnight as risk aversion came back into fashion, while safe-haven JPY, the reverse of that trade, was the best performing one. Otherwise USD was virtually unchanged against the G10 currencies compared with yesterday morning’s rates. On the other hand, it gained against all 15 EM currencies that we track, led by ZAR. TRY was the second-worst performing EM currency after a teenager injured during a police crackdown last year died, triggering protests in Istanbul. • The collapse in copper affected oil prices as well, and the rout in commodities dragged US stocks down too. Oil and gas were the worst-performing sector, followed by basic materials and industrials, as one would expect in a market driven by fears of a slowdown in global growth. The slowdown in Chinese growth is causing oil demand there to slow and increasing the amount of Chinese exports of refined products, which is depressing oil prices globally. • I expect that the tensions in Ukraine will only increase as the referendum approaches, while the unravelling of the Chinese credit bubble is just getting started. Hence I think these trends are likely to continue and indeed intensify. AUD seems vulnerable to me, as does CAD as oil prices start to be dragged down with metal prices. The SNB’s intervention means that JPY is likely to respond more to safe haven demand than CHF. AUD/JPY would be one way to play the slowdown in the Chinese economy. • During the Asian morning, it was announced that Japan’s Tertiary industry index rose 0.9% mom in January, beating estimates of a 0.6% mom rise. Concerns over China trumped this news however and stocks fell. In Australia, home loans were unchanged in January, disappointing expectations of a 0.5% mom rise, and perhaps contributing to the decline in AUD. • The European day today is fairly quiet. We have only the Eurozone’s industrial production for January and the US MBA mortgage applications for the week ended on March 7. Eurozone industrial production is forecast to have risen 0.5% mom in January after declining 0.7% in December, driving the yoy rate up to +1.9% from +0.5%. • Wednesday’s schedule includes four ECB speakers. The European Central Bank Governing council member Luis Maria Linde speaks in Spain, while the European Central Bank Executive Board members Peter Praet, Benoit Coeure and Yves Mersch speak at a conference on “The ECB and Its Watchers.” • Then late Wednesday, the Reserve Bank of New Zealand will hold its monetary policy meeting. This should be a landmark meeting as the RBNZ is expected to be the first G10 central bank to raise rates during the current easing cycle. It’s widely expected to raise its official cash rate by 25 bps to 2.75%. In fact another rate hike within the year is already priced in. Given the widespread expectations of a hike, the response of NZD depends on what comments Gov. Wheeler makes following the m
Posted on: Wed, 12 Mar 2014 09:03:52 +0000
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