Capital Markets Catch-Up, Dollar and Dollar-Bloc Ease Back

Asian and European capital markets are responding to the pre-weekend developments in the US, and especially the drop in the major equity markets. 

Many Asian equity markets were lower, led by the 1.7% decline in the Nikkei. Several did shrug off the foreign impetus and posted gains, led by Indonesia’s 1.3% rise. Malaysia, Thailand and South Korea also managed to post minor gains. European bourses have been knocked back, with the Dow Jones Stoxx 600 off about 0.7% in late morning trading, in London. Technology, spurred by the US decline, is the weakest sector in Europe, off near 1.8%, followed by financials and health care, off a little more than 0.8%. 

Asian bonds took the lead from US Treasuries, where the 10-year yield tumbled eight bp, despite the constructive employment report. The three bp decline in 10-year JGB yields more than offsets the 2 bp increase over the past month. European bond yields are higher, with Italian and Spanish yields rising the most (3-4 bp). While French bonds are under-performing German bunds, it does not appear as a result of the push back against Hollande’s request for a softening of the EU’s deficit targets. Even though this was an important development at the end of last week, the new development is that the government appears to have back tracked. Now it appears that the new French Prime Minister Valls will announce a 50 bln euro savings plan tomorrow. 

In the foreign exchange market, the dollar is mostly softer against the major currencies. However, the general tone is one of consolidation. The euro and sterling remain within last Friday’s trading range. Initial resistance is seen near that high for the euro near $1.3730. However, stronger resistance may be encountered in the $1.3750-65 band. Sterling is under performing a bit, but the tight range (less than a fifth of a cent so far today) suggests a lack of interest. 

The dollar has fallen through its pre-weekend lows against the yen near JPY103.20 but found a bid near JPY103.00. Resistance is seen in the JPY103.40 area. The dollar has slipped marginally through last Friday’s lows against the Swiss franc, but the CHF0.8900 is holding. Better support is seen near CHF0.8880. 

The dollar-bloc is also in a consolidative mode. The Aussie continues to knock the $0.9300 level but without any momentum. Kiwi is flat. Against the Canadian dollar, the greenback is testing previous support that is now resistance (CAD1.10). Resistance extends toward CAD1.1030. 

The news stream has been particularly light. Following better than expected German factory orders reported last Friday (0.6% vs 0.2% consensus), industrial output rose a bit more than expected (0.4% vs 0.3%), though the January rate was shaved to 0.7% from 0.8%. The report confirms what the survey data has already indicated. While the world’s fourth largest economy continues to expand, it has lost some momentum in Q1. On a year-over-year basis, German industrial output rose 4.8%. 

Meanwhile, Spain’s industrial output rose 2.8% on a year-over-year basis, well above the consensus forecast of 1.7%, following January’s 1.1% rise. The report lends credence to the survey data suggesting the recovery in Spain is gaining traction. Indeed, stronger growth in Spain has taken place alongside a drop in prices. Specifically, the negative preliminary CPI print is expected to be confirmed later this week. 

The Swiss inflation data was interesting. Not so much for what it says about Switzerland, but what is may suggest about the euro area. Specifically, recall that the ECB argues that due to Easter distortions, the region’s CPI, which fell to 0.5% is likely to bounce back to 0.8-0.9% this month. That distortion was not evident in the Swiss CPI, using the same harmonized methodology. Swiss CPI rose 0.6% in March. For Switzerland, it left the year-over-year pace in slightly negative territory (-0.1% from -0.2%). 

Turning to Russia, there are fears of more sanctions following apparent efforts to destabilize east Ukraine. Pro-Russian demonstrators have seized office buildings there, according to report, seeking a referendum to join Russia. The rouble has returned to last week’s lows against the dollar and the MICEX is off about 1.5%. Moody’s cut Ukraine’s rating before the weekend and Ukraine bonds have fallen today, with the 10-year 23 bp to 8.73%, though the credit default swap is little changed. 

The North American calendar is light today. The Bank of Canada Senior Loan Officer Survey may be of passing interest and later today the US reports consumer credit (February). US household consumption has been rising at a fairly steady pace, but it has been without much use of revolving credit (credit cards) as today’s report will likely demonstrate. The bulk of the increase in consumer credit is auto and student loans.