Markets Today

The news stream from Europe coincided with the technical need of a correction after the early test in Asia on the $1.35 level, which coincides with a 50% retracement of the euro’s decline in the Nov 09-May 10 period. The news stream of EC concerns, tension between those who want for central authority in Europe and those that don’t, and problems in Ireland is hardly surprising and seems as if this was used to take profits/shake out weak longs.

The Irish government is increasingly desperate to stop downward spiral, underscored by the 1.2% quarter-over-quarter decline in Q2 GDP. On Thursday it is expected to present the final costs Anglo-Irish bailout.

Thursday also marks the expiry of 225 bln euro in ECB refi operations. These include 1-year (75 bln), 6-month (18 bln) and 3-month (132 bln) funds. How European banks deal with this may offer important insight. The banks can roll it all into 3-month money. It can roll it into a 6-day to then roll it into normal 7-day operation next week. The smaller rolls, as banks are encouraged to wean themselves off ECB lending could see the Eonia firm. Separately, the ECB reported that money supply M3 rose 1.1% in August (year-over-year), well above the 0.3% expected. To be sure, money supply growth remains abysmal, but news that loans to businesses and households rose to its fastest pace in 14 months is probably the most promising news from the euro zone in a while. The recent string of data suggests the pace of slowing after the strong Q2 may have accelerated as Q3 progressed. Euro support is seen near $1.3380-$1.3400 and only a break of there would force the bulls to reconsider.

News that Japanese exports slowed more than expected in August and that corporate service prices fell 1.1% (year-over-year) served to keep the focus on the policy response. First, reports indicate that Prime Minister Kan has called on his cabinet to produce an extra budget that could be ready within a couple of weeks.

The preliminary talk is for a JPY4.6 trilion package. There is some discussion over how it should be funded. Given the high debt/GDP ratios and vulnerable ratings, some want to use the “excess” tax revenue (above target) and fiscal cushion (unspent funds) to fund the extra budget. Others want to issue more bonds.

Second, the BOJ itself recognizes the fragility of the economy and Governor Shirakawa seems to have adopted an easing bias noting that more attention needs to be paid to the downside risks of consumption and production. The Tankan Survey this week will be important. Perhaps the most important element won’t be the modest improvement the consensus expects, but the outlook for the December report. A negative reading would likely increase the pressure on the BOJ to take additional measures when it meets next month. The dollar has retraced 61.8% of its intervention led bounce (comes in near JPY84.05). Although it could be frayed in North America, it is unlikely to settle below it for fear of antagonizing the BOJ.

US-Japan-China tensions continue to run high. Japan has released the fishing boat captain, and Prime Minister Kan has been widely criticized for appearing to back down, which appears to have toughened the government’s resolve not to apologize or make some reparations as China has demanded. Instead, Japan has now asked for compensation.

Reports suggest that China is using low level irritants to harass Japan, like allowing local customs officials to prevent the shipping of rare earths to Japan and tightening the inspection of all Japanese air cargo—forcing some delays in the delivery of auto parts and some machinery (according to Japanese press). Meanwhile, the bill aimed at China’s yuan passed the US House Ways and Means Committee on Friday and China appeared to have responded with its own warning shot—imposing anti-dumping duties of as much as 105.4% on broiler chicken products, which it has been investigating since April and has concluded that US subsidizes them via agricultural supports for the soybeans and corn used for feed.

The entire House is expected to vote on the bill on Wednesday. The larger the majority the more pressure is perceived to be on the Senate to take the measure up. The Senate appears reluctant and is on its pre-election recess as of Oct 10. Elsewhere note that Moody’s has changed the rating outlooks for four of China’s largest banks to stable from positive. The yuan was fixed at CNY6.7098, a bit higher for the dollar since the last fix before the holidays starting in the middle of last week. The yuan strengthened during the session and indicative prices now put the dollar just above CNY6.69.