International Morning Comment
Markets are calmer again this morning, with the predictable result that the yen is weaker and the euro and high yielders firmer. There are still calls for an immediate rate cut to ease pain in financial markets, but Bernanke seems rather determined to restore discipline in lending standards and risk management buy forcing lenders and investors to sort this out and take their losses. Over the long haul restoring market discipline is a good move; but it is also a good bet that any sign of emerging underlying economic weakness will lead to easier policy. In the meantime the Fed is taking administrative steps to make liquidity flow, such as the move yesterday to cut the fee for System Open Market operations.
The dollar has a somewhat weaker undertone this time, suggesting that we may be starting to see a bit of calm entering the markets — no guaranty yet of course. Hedge funds will undoubtedly face notice of planned withdrawals and will have to sell assets to prepare to meet those calls in coming weeks. Private equity deals still struggle to find financing and overly leveraged deals will not meet the return test once higher risk premia are penciled in, so this could be a slow unwind, possibly punctuated by another big chunk of bad news.
The Reserve Bank of Australia added liquidity to the system this morning. Tonight the Bank of Japan meets but no rate move is expected. The economic view will be important. So, it is still day-to-day.
Most global equity markets are up this morning, with the MSCI Asia Pacific up 0.3% despite flat to softer markets in Japan. The Hang Seng continues to outperform, probably on expectations of more Chinese money flowing in. European markets are solidly firmer, with the DAX up 0.9% and the CAC40 up 1.3% around 7:00am, est. A French bank said that it hoped to release funds frozen earlier this month, if market conditions allow, and that has given French markets a boost.
Bond prices are down this morning, with yields up 1bp in 10’s in Japan and 2bp in 2s, outperforming European markets just as the NIKKEI underperformed. Yields in Europe are up about 3bp in 10’s and 7-8bp in 2’s; in the UK they are up about 5bp across the curve. Corporates are doing a bit better. The Itraxx Crossover index fell to 228bp; it soared to over 500bp at one point in this meltdown.
Oil prices firmed ahead of today’s US inventory data, with the US light crude contract up 22 cents at $69.79/bbl and Brent up 20 cents to $68.89/bbl. US crude stocks are projected to have fallen by 2.8 million barrels last week, with a drop of 900,000 barrels in gasoline. Hurricane Dean did not seriously damage oil facilities in the Bay of Campeche but rigs and platforms have been evacuated, temporarily disrupting Mexican production.
On the data front, Japanese exports and imports rose in value terms in July; both were up 0.5% M/M. The seasonally adjusted surplus edged up to ¥823 billion from ¥822 billion in June. In real terms exports rose 1.1% in July with imports up 1.4%, leaving the real balance almost unchanged from June and from Q2 as well.
In the Eurozone, new orders were up 4.4% in June, beating expectations; this followed a rise of 1.5% in May. Transport orders jumped 15.7%, a lumpy component of the orders data. Orders in Germany and France were particularly strong. The Eurozone current account surplus rose to E5.9 billion sa in June from a deficit of E7.8 billion in May.
UK CBI industrial trends data were firm in August. Total orders jumped from -6 in July to +9 in August, with expected output up to 13 from 10. Export orders improved, with that index at -3, up from -8.
Australian leading indicators jumped in June, rising 1.0% after a 0.2% increase in May. DEWR skilled vacancies rose 0.7% in August after a 0.1% drop in July. The economy remains strong but the upcoming election and financial jitters will keep the RBA on hold for now.