Mr Market Feeling Better

Mr. Market is feeling a bit better today, and the dollar and yen's safe havens are not as needed.  Global equities and emerging markets generally doing better.   Peripheral bond yields are mostly lower, and core bond yields marginally higher.  

The news stream has been favorable for risk taking.  The recovery in US shares yesterday, perhaps on some optimism the fiscal cliff can be averted, provides a constructive backdrop for today's price action, though we are still skeptical that there has been much progress.

However, it is the news stream from Europe today that is lifting sentiment.  The dollar tended to consolidate in Asia before Europe took it lower as a series of economic reports were better than anticipated.  This includes Swiss and Swedish GDP figures.  The Swiss economy expanded 0.6% in Q3.  The consensus was for a 0.2% expansion, after contracting 0.1% in Q2. 

 

As a side note, it is interesting that the US Treasury gave Switzerland, who has most actively prevented its currency from adjusting to capital flows, from criticism in its recent report on the foreign exchange market.  If its massive intervention and cap on the franc is not manipulation, it is difficult to see what can fit that definition.  

In any event, Sweden also reported stronger than expected Q3 growth.  The 0.5% expansion topped estimates of 0.1%, with some even warning of contraction.  Soft Oct retail sales (-1.7% vs -0.5% expectations), released today as well, still keeps the door ajar to a rate cut next month.   Separately, German unemployment rose 1/3 of what was expected (5k not 15k) and VDMA reported a healthy 7% year-over-year rise in engineering orders.  An 11% rise in foreign orders offset a 1% decline in domestic orders.  

In addition euro area sentiment index rose more than expected (85.7 from 84.3 in Oct and 84.2 consensus), with business sentiment improving modestly while consumer sentiment stagnated.  Italian business confidence also improved.  Lastly, we note that the UK's CBI Distributive Trades survey was also better than expected at 33 in Nov compared with 18 expected and 30 in Oct.  

Breaking this pattern, the market did not read the Australian capex report favorably even thought the Q3's 2.8% increase was more than the consensus call for 2.0%.  What caught the market's attention, and saw the odds of a rate cut increase in the OIS market, was that the forward looking investment plans were poor, at 3%, near historic lows.  In addition, in an op-ed piece in the WSJ, the RBA is suggesting that central bank and sovereign wealth fund purchases of the Australian dollar are near a peak as they are near limits in how much they can carry.    

While this may have helped prevent the Australian dollar from testing the $1.05 area, those limits self-imposed and, in fact, there are rumors today that Russia may announce an increase in its Australian dollar purchases.  Recall that Russia said yesterday that it was not switching reserves out of euros.  Instead, we suggest, it, like others, is more engaged with diversifying the new inflows of reserves. 

The North American session features what should be a modest upward revision in US Q3 GDP to toward 2.8% from 2.0%, largely a reflection of stronger inventory and trade figures.  The larger inventories, coupled with the fiscal cliff added uncertainty means the economy is unlikely to maintain the momentum here in Q4.  The market also awaits the European court ruling on whether the ECB must release details of the derivatives that Greece used to hide its debt. 

Lastly, the German Bundestag is scheduled to vote on the Greek aid plan tomorrow.  Reports suggest that at least 25 CDU parliament members will vote against the government.  This might be unpleasant for Merkel but has little real cost.  As they have done before, the SPD will deliver Merkel a majority.  However, the debate can be messy and this is the cost for the Chancellor.  Meanwhile, Schaeuble has affirmed the existence of another source of support for Greece.  He has acknowledged that the current EU budget has earmarked a remaining 13.4 bln euros in structural funds for Greece than can be used for infrastructure projects that can be used to help blunt the impact of austerity.