Opening comments
The NIKKEI closed flat overnight amid speculation the BOJ will keep rates unchanged in light of the worldwide credit crunch. That said, JPN FIN MIN Omi, in remarks with Korean FIN MIN Kwon, said financial market turmoil should be closely monitored and noted the need for identifying risk that may cause turmoil. The massive unwinding of carry trades last week pushed the JPY to levels not seen since 2005 and drew fire from FIN MIN Omi who suggested such large flows create volatility in global markets. Omi, apparently aware of some damage caused by the JPY whipsaw, said traders might act more judiciously when placing “one way currency bets”. The 10yr JGB fell below 1.60 overnight trading at 1.559% ahead of tomorrow’s BOJ rate decision . USD/JPY is trading in the upper end of y/day range.
European markets are subdued today as well with a good bid to the FTSE on BHP’s earnings announcement accompanied by a dividend hike and a decidedly upbeat assessment of Chinese demand for their mining products. CABLE is also trading within y/day’s range and the 10yr yield is up 5bps at 5.047 with some notion the BOE may be on hold due to credit worries. The German 10 year rates are up slightly as well at 4.26% in some follow-on selling to the volatile U.S. session yesterday. FTSE and DAX are both higher leading into the U.S. open but are clearly in consolidation mode.
Yesterday’s massive unwinding in the short rates and the 10yr has raised the spectre of an equity market rally today. FED FUNDs are 5 1/16 at 1/8th ahead of the open.
MBA Mortgage Applications were down 5.5% in the week ending 17 August behind a 3.4% increase 2 weeks ago. The DOE releases Crude and Products Inventories at 10:30am EST; Crude is expected down 2.75mln, GAS is expected to drop 800k, Distillates are expected to build 850k and refinery usage is expected up .28%.
Markets look to be in overall consolidation mode with the FED keeping an eye out for more volatility and expected to react quickly. Gold and Silver still look to be in accumulation mode. Expect Crude Oil will take back some of y/day’s losses and be dependent on DOE data for direction. If interest rates and the bond market remain calm the dollar should start selling off as safe-haven longs unwind.