Market Jitters Persist

Highlights
The US dollar is up across the board as concerns about European peripherals festered and comments from North Korea fanned fears of further escalation on the peninsula. Despite the likely announcement of an €85bln rescue package for Ireland on Sunday, the euro continues to suffer reaching recent lows of $1.32 and nearly retracing 50% of June’s lows. The euro also continued to lose ground as FT Deutschland reported euro-zone countries are encouraging Portugal to accept a bailout in a bid to stop contagion affecting Spain.  Meanwhile, sterling continued trade on a heavy foot reaching a session low of $1.566 with the yen down as well following the concerns on the Korean peninsula. Elsewhere, on the back of risk aversion, coupled with a less hawkish statement from the RBA, the Australian dollar led declines among the majors with a drop to A$0.961.

Global equity markets after a brief respite lost ground amid concerns about sovereign issues in Europe and concerns about Korea. The MSCI Asia Pacific index is down 1.2% with the Nikkei down 0.4%, led by losses in financials.  The Shanghai Composite is down 0.9% with the KOSPI down 1.3%.  In Europe stocks were weaker with the Euro Stoxx 600 down 1.2% led by a 2.5% drop in financials.  On the day financials are down nearly 5% on both the Irish and Spanish bourses.  Meanwhile, the FTSE and Dax are both down 1.5% and 1.2% respectively, led by losses in materials and financials. 

European sovereign bonds yields continued to increase with the Irish 10-year yield up 9bp while Portugal’s 10-year yield is up 4bp. The continued weakness in the periphery yields is driven by the contagion effect with concerns that Portugal will be forced, or at least need, to accept a rescue package.  Spain’s 10-year yield is up 5bp with Greece’s yields flat on the session.  The 10-year German yield is down 3bp as investors flock to safe haven bonds.  And finally, the US Treasury is flatter with the 2- and 10-year tenors both down by 4bp.   

Currency Markets

The FT Deutschland is reporting this morning Portugal is under pressure from eurozone officials and policymakers to seek assistance from the €750bln ($1 trillion) bailout fund. The concern is that Spain is being brought into play by the contagion effect, and the hope is that plugging the Portugal problem may bring that contagion to a halt. Still, that was the hope with Ireland. The average yield investors demand to hold 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached 7.52% yesterday, a record in the time of the euro according to Bloomberg. ECB council member Axel Weber asserted overnight that EU governments could increase the size of the European Union-led bailout fund if necessary to restore confidence, saying  ‘€750 billion should be enough to assure the markets. If not, it will have to be increased.’ He said that at most the fund would need an additional €140bln, an amount that would not jeopardize the survival of the euro.  Meanwhile, German state Bavaria November CPI accelerated sharply to 1.7% from 1.4%. This was the fifth state to report data and all states have reported accelerations in the headline rate.

North Korea said it was ‘greatly enraged’ by provocation from South Korea, reigniting fears of an escalation in tensions on the Korean peninsula. USD/KRW climbed back yup to a high of 1164, before settling in the high 1150s. The KOSPI fell 1.3%, the most in two weeks. A statement from the North Korean news agency said that any ‘escalated confrontation could lead to war.’ South Korea’s current account surplus widened to the most in three months in October, suggesting the government’s concerns about currency strength may be overstated. Exports climbed 27.6% from a year earlier, compared with a revised 16.2% increase in September. Imports rose 21.3%.  That helped the surplus to widen to $5.37bln in October, up from a revised $3.95bln in September. The trade surplus increased to $6.54bln in October from a revised $5.57bln in September. Japan’s core CPI fell for the 20^th straight month in October, though a little less than the previous month. Consumer prices excluding fresh food fell 0.6%, less than the 1.1% drop in September.

Hungary’s ruling Fidesz party continues to meddle in the fiscal and monetary framework of the country. Economy Minister Gyorgy Matolcsy announced yesterday that citizens must move their private pension assets to the state or lose most of their pension. The government is trying to bring 3 trillion forint ($14.6bln) of privately managed pension assets under state control to reduce the budget deficit and public debt. Workers who opt against returning to the state system stand to lose 70 percent of their pension claim. Earlier this week Fidesz submitted an amendment to the Central Bank Act that would give the cabinet sole control of appointments to the central bank Monetary Policy Council.  Currently, the central bank president and the government split the appointments evenly.  This would help prevent the government from stacking the 7-member MPC with friendly members, but that is exactly what Fidesz wants to do.  The terms of 4 MPC expire on March 1, and under the current law, replacements would be split between central bank chief Simor and the government.  Proposal would allow the government to appoint all 4 and would simply complete the process started back in 2005, when then-Prime Minister Gyurcsany first wrested control of some of the MPC appointments from the central bank. We think markets have gotten too sanguine about policy risks in Hungary and believe that the forint will be amongst the hardest hit if the deeper EM correction continues to unfold.

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