Markets Like What They See and Hear
The combination of a 50 bp cut in China’s required reserve ratios and anticipation that the European finance ministers sign off on the second aid package for Greece has lifted equity markets and most of the non-US dollar currencies.
The MSCI Asia-Pacific Index rose 0.8%. Hong Kong’s Hang Seng Index was the lone exception in Asia, slipping 0.3%. Higher than expected inflation (6.1% vs consensus of 5.8%) may have played a role, but losses were widespread, led by oil and gas (-2.2% consumer services (-1.9%) and technology (-1.85). European bourses are higher with the Dow Jones Stoxx 600 up 0.8% near midday in London. Basic materials, industrials and financials are leading the advance.
US and Canadian markets are closed, but the key event today is the European finance ministers’ meeting. There are still a number of issues that need to be worked out, including the mechanisms for surveillance of the implementation. Talk continues about the establishment of an escrow-like account. In addition, the interest rate on the EU/IMF aid may be further cut. It had begun near 5% and had been cut last year to 4%. Another cut, especially if retroactively applied could further reduce projected debt/GDP ratios.
Oil prices are rising as news that Iran will halt crude exports to France and the UK. Combined they absorb about 3% of Iranian’s oil sales. European crude and product inventories are estimated at 120-days of consumption.
The euro has been range bound for several weeks. Last week it tested the bottom end of the range in the $1.2980-$1.3000 and it largely held. By the rule of alternation, it is now poised to test the upper end of the range, seen in the $1.3300-20 area.
Sterling has also recovered smartly off last week’s low near $1.5645. The $1.5930 area marks the last high, but the more important cap is seen around $1.60.
The yen is consolidating last week’s sharp losses, following the BOJ’s unexpected JPY10 trillion in new JGB purchases announced on Feb 14. The dollar moved to almost JPY80 (~JPY79.90) in early Asia, the highest level since mid-July last year, before consolidation set in during the European session, as broader based dollar selling proved too much.
Separately, Japan reported a somewhat larger than expected trade deficit for January. The deficit of JPY1.475 trillion compares with a surplus of JPY479 bln in January 2011. The shift reflects several forces. First, the increased energy imports (mostly oil and gas) in the post-earthquake/tsunami environment, is playing a role. The softening demand in Europe an Asia (exports are off 7.7% an 13.7% respectively on a year-over-year basis) is also evident. The decline in exports to Asia may be a bit exaggerated by the Lunar New Year falling in January rather than February.