Frustrating Friday as Euro and Sterling Bounce Back

The market has shrugged off the disappointing euro zone PMI to take the euro to a marginal new high for the week, and again mapping transversing the range of about $1.3140-$1.3500.   Sterling too rose through yesterday's highs, albeit briefly, though failed to take out the week's high set on Wed near $1.5923. 

While this price looks impressive, color me suspicious.   The Australian dollar, which to my chagrin, led the move lower, has not rebounded as convincingly and is struggling to sustain the thrust back above $1.04.  The underlying impulses remain problematic.  

As Greece delays their bank recapitalization until next month (after earnings) the Greek new 10-year sovereign bond has sold off, with yields hitting 20% for the first time since the swap near midday in London.  Italian and Spanish bonds remain under pressure as they have all week.  Lastly, note that the US-German 2-year spread has is a little more than 11 bp, the highest since last Wednesday. 

That said, Italy's January retail sales rose 0.7%, surprising the market that was looking for a 0.1% decline and the December decline of 1.1% was cut to -0.8% in the revision.  French business confidence was a modest upside surprise, coming in at 96 compared with 93 in February and the consensus expected no change.  Separately the government now see Q1 GDP as flat before a 0.2% growth in Q2. 

We have noted that the weekly Japanese portfolio flow data show that Japanese investors have more than doubled their purchases of foreign stocks and bonds this year while foreign investors have cut in half their purchases of Japanese stocks and bonds. 

The most recent data was released earlier today and covers the week to March 17.  Here there is some indication of Japanese repatriation ahead of the fiscal year end.  Japanese investors were net sellers of foreign bills (JPY38.8 bln), equities (JPY57.8 bln) and bonds (JPY721.5 bln). 

Foreign investors bought Japanese shares (JPY287.5 bln) as they have done every week this year.  On the fixed income side, they sold bonds (JPY1.07 trillion) for the first time in four weeks and parked the money in bills (JPY1.09 trillion).   A move to bills makes investors more sensitive to yen movement.    As a while, Japan recorded net inflows of JPY1.13 trillion in the week to March 17 compared with a net outflow of JPY20.6 bln the previous week. 

The Chinese yuan has been interesting this week.  Concerns about flattening demand for iron ore (BHP) start the week, the cut in reserve requirements for some agricultural banks, and the weak HSBC PMI manufacturing survey weighed on Chinese shares,with the Shanghai Composite losing 2.3% this week to finish the week with its lowest close since mid-February. 

Yet today, the the PBOC set the reference rate at a record dollar low/RMB high.  The market pressure, if such is discernible, is for a weaker RMB and the market did buy dollars after the fix.  Volatility appears to be increasing, though there have been other such periods, but it has increased speculation that the band may be expanded (from current +/- 0.5% from the reference/fix rate).