21 January 2011 at 14:42 GMT
This market is proving treacherous as we seem to have a hard time developing persistent moves. Today – strong GE earnings and a Shanghai bump in the night have the bulls out trying to feed on yesterday’s bounce in risk. Will we reverse the reversal here?
Bulls seem to have renewed hope this morning after China saw a solid rally overnight, particularly encouraging (foolhardy?) in light of the fact that Shanghai’s mayor announced the imposition of a limited property tax to stem increases in property prices. An article from Bloomberg says prices for apartments in Shanghai have reached an average – yes, average, of $3,652 per square meter, and are up 21% from last January. From this quickly scanned article, it only appears that the tax will be levied on new luxury homes – the most aggravated sector of the housing bubble. “Limited” tax indeed.
Odds and ends
Germany’s IFO came out at yet another record. The only negative spin we can come up with here is that the current conditions component dropped by a tenth of a point – the first drop in 11 months. If this survey heads any higher, the country will have to be renamed with “Nirvana” figuring somewhere in the description of the Republic.
New Zealand retail sales data was rather ugly at the core. Our favorite interpretation of the development was that sales were lower due to the “drop in food prices” in December. Tell Tunisia about that fall in food prices….
SNB’s Hildebrand out yesterday saying that the stronger franc will lead to a “notable slowdown in economic growth in Switzerland this year”. This is highly relevant if interest rates continue to head higher globally, as CHF will continue to suffer in the spreads.
UK DecemberRetail Sales were disappointing and drove EURGBP to a new local high, but we now have a pretty interesting intraday reversal in that pair that suggest the highs are in if it can close back below the key moving averages (around 0.8460). If ever there was a weather-affected month of economic activity it was December in the UK, with massive travel disruption and the coldest weather in 100 years.
Australian import price index: whoa, look at how inflation is (not) rocking the boat Down Under, with Import Price Index falling at a -8.1% rate. This shows the power of currency strength. There will be less of this effect going forward as we suspect the Aussie peak vs. the rest of the G-10 as a basket is behind us. Still, hard for the RBA to argue for rate hikes from an inflation perspective. We note the new lows in precious metals this morning and weak copper prices of late as providing counterweights to the rally in risk appetite elsewhere.
Looking ahead
Everything looks sublime on the Euro-worry front, the obvious reason we are trading at 1.3550 in EURUSD as of this writing and the reason we have seen the likes of EURNZD is up about 1,000 pips from its lows of about ten days ago. Still, it is interesting to note the tactical reversal in EURGBP (as we note above), which failed to hold the two-week plus high today despite the positive IFO news and negative UK retail sales news. EURUSD may be reaching its maximum altitude as well – though we suspect based on recent days’ action, that the greenback will need a helping hand from risk aversion to put the kibosh on this rally.
Next week is FOMC week, and although it is very interesting to note that this is the first meeting with the three regional presidents Fisher, Plosser and Kocherlakota now in a position to vote on the new monetary policy statement, we don’t expect any major new developments in the language of the statement. At this point, with the market doing what the Fed wants (the theme of a rising equity market being the Fed’s “third mandate”) we should only expect a “positive spin” kind of statement, that suggests things are moving in the right direction, all due to the Fed’s all-comforting guiding hand and bond buying. Yes, that was sarcasm you detected. Also, will a Fisher or Plosser be brave enough to put in a dissenting vote on the course of Fed policy?
As a background note, we have a hard time believing that the market is in such a risk-happy mode with the threat of Chinese clampdown still imminent and with the New York times leading with an article titled Path is Sought for States to Escape Debt Burdens. Among those burdens is an attempt to escape the crushing weight of pension promises to state employees. Estimates of up to $3 trillion dollars in insufficient funding are floating around. Some levels heading into the close that help to determine whether the USD can hold the line today and stave off the threat of another reversal: 0.9925 in AUDUSD, 0.9590 in USDCHF, 0.9910 in USDCAD (Fibo), and 82.40 in USDJPY.
Have a wonderful weekend and be very careful out there.
Economic Data Highlights
- New Zealand Dec. Business NZ PMI out at 53.1 vs. 52.7 in Nov.
- New Zealand Nov. Retail Sales out at +1.5% MoM and ex Auto at -0.2%, vs. +1.1%/+0.5% expected, respectively
- Australia Q4 Import Price Index fell -3.8% QoQ
- Australia Q4 Export Price Index fell -8.1% QoQ
- Germany Jan. IFO out at 110.3 vs. 109.9 expected and 109.8 in Dec.
- UK Retail Sales ex Auto Fuel out at -0.3% MoM and +1.0% YoY vs. -0.3%/+1.3% expected, respectively and vs. +1.6% YoY in Nov.
- Canada Nov. Retail Sales rose +1.3% MoM and +1.0% less Autos vs. +0.5%/+0.5% expected, respectively
Upcoming Economic Calendar Highlights (all times GMT)
- Australia Q4 Producer Price Index (Mon 0030)
- Japan Dec. Supermarket Sales (Mon 0500)