Week that Began with a Bang Ends with a Whimper

The foreign exchange is calmer and narrower ranges have prevailed. The political uncertainty appears gradually easing. A new Greek technocrat government is taking office in Greece and Italy's Senate will vote on the austerity measures and the Chamber of Deputies will vote on them over the weekend. This will pace the way for a technocrat government early next week. A euro move above $1.3675 could spur a further advance toward $1.38.

Equity markets are generally higher after the Wall Street rally yesterday and the better news stream from Europe. The MSCI Asia-Pacific Index rose 0.8% today, recouping a bit of Thursday's 3.3% decline, the largest downdraft in seven weeks. Korean shares jumped 2.5%. Korean companies are to be one of the beneficiaries of the yen's appreciation. European shares are 0.6-1.3% higher near midday in London. Industrials and financials are leading the advances, with telecom and oil the laggards. The US equity market is open on Veterans' Day, but activity is expected to be light.

Global bond markets are also quieter today. Two things stand out. First, with a backdrop of talk of continued ECB buying, Italy bond yields continue to pullback. The 10-year yield is off around 25 bp at 6.66% and the 2-year yield is off about 44 bp at 5.96%. The markets will learn on Monday the extent of ECB bond buying--at least for earlier this week--and while an increase is expected, the ECB is still not prepared to provide unlimited support.

The second observation and does not appear generally appreciated is that French 10-year bonds (generic) have actually performed worse than Italian bonds. The 10-year Italian yield is up net-net about 28 bp, while the French 10-year yield is up 37 bp.

Local press reports in Japan and some analysts at Japanese banks argue that the BOJ has been covertly intervening in the foreign exchange market. The evidence is some increase in the BOJ current account balances and activity in the financing bills (which is how the yen are raised for intervention purposes). It is difficult at this juncture to verify it, however, the dollar has fallen to its lowest level against the yen today since the massive intervention on Oct 31 to near JPY77.30. Overt intervention to the tune of around $100 bln triggered about a 5% knee-jerk rise the dollar. Yet it was unable to inflict sufficient pain on yen bulls (by driving the dollar above JPY80 and the dollar has gradually bled lower. If the reports are true, can we really be surprised that what $100 bln in overt intervention was unable to do, the smaller covert intervention has not seen much success.

The UK reported softer than expect PPI data. Input prices fell 0.8% to put the year-over-year rate at 14.1%, the lowest since the end of last year. Output prices were flat and the 5.7% year-over-year rate is the lowest since May. Sterling has generally under-performed the euro. The euro is extending its recovery against sterling after dipping below GBP0.8500 yesterday for the first time since March. Against the dollar, sterling is in narrow ranges around the middle of yesterday's range.

Highlights from the emerging markets include, MSCI's Emerging Market Index is up around 1% near midday in London for its biggest gain of the week. Technology and consumer sectors led the advance. Turkey reported a 1.5% rise in industrial output in Sept. The 12% year-over-year increase is roughly twice the consensus estimate. This likely keeps short-term rates firm and has underpinned the lira, which is the strongest EM currency today, up about 0.75% against the greenback. East and central European currencies have also done well as the euro has stabilized. The Mexican peso and the Brazilian real are poised to also trade higher today.