Markets Take A Breath--Fragile Consolidation

Beginning a 10-day business trip to Asia.  Posts over this period may be sporadic.

The US dollar is slightly weaker today, but generally consolidating yesterday's large advance.  The tone is cautious and fragile with the Greek PSI conclusion looming. Although Greek banks and their pension funds, coupled with the most of the IIF's steering committee and some large European banks have indicated they will participate, great uncertainty continues to hang over the market.  

Asian equities were down for the third consecutive session.  The 0.9% decline in the MSCI Asia Pacific Index is sufficient to push it to its lowest close since early Feb.  It is now up about 10% for the year compared with almost 7% for the S&P 500 and 6% for the Dow Jones Stoxx 600.  The latter is up about 0.3-0.4% near midday in London. Of note financials are up about 0.7% after losing about 7% in Monday and Tuesday's swoon.  

In the bond market, peripheral spreads are against Germany are mostly wider, but Italy is a notable exception and the 10-year benchmark is the best performer in Europe, with yields off 10 bp.  The spread between Italy and Spain is widening out further in Italy's favor.  This is one of the more notable developments in European bonds in recent weeks and it is continuing.   

In terms of economic data, there have been a few surprises.  Australia surprised by reporting Q4 GDP at only 0.4%, which is about half of what the consensus anticipated.  The Australian dollar was sold on the disappointment, but has since recovered amid the broader stabilization of the capital markets.  A close above $1.06 would help the technical tone, but ahead of tomorrow's employment data, where a small 5k increase in expected (and a tick up in unemployment) it may be too much.  Although the RBA stood fast this week, a rate cut in Q2 remains a distinct possibility.  

Germany surprised as well.  It reported a 2.7% decline in manufacturing orders.  The consensus was for a 0.5%-0.6%  gain.  This warns that tomorrow's industrial output figures may also be on the low side.  The consensus expects a 1.1% gain.  The weakness in today's report is largely a function of foreign orders as domestic orders rose 0.9% recovering half of the December decline.  Looking at those foreign orders, EMU orders slipped 0.4%, but the more significant development was the 8.6% decline in non-EMU orders.  This may be picking up the lunar new year effect.  In December such orders rose a little more than 12%. 

Switzerland surprised with a 0.1% rise in Q4 GDP.  The consensus called for a small contraction.  The CHF4 bln decline in reserves indicates the SNB is not having much difficulty maintaining the cap on the franc.  March 15 the SNB meets but no change in policy, including that cap, is likely.  The dollar is meeting resistance near CHF0.9200. Support is seen near CHF0.9120.   Note that the dollar's 5 day moving average have moved above the 20 day average yesterday, which is understood as a constructive indicator for trend followers.  

The dollar is consolidating against the yen between roughly JPY80.60 and JPY80.90.  Japan reports several interesting data points on Thursday.  These include what is likely to be a current account deficit for January, not just a trade deficit; an upward revision in Q4 GDP, following the recent capex survey (to -0.1/-0.2 vs -0.6% initially); and bank lending figures for February after January figures showed the strongest increase since Oct 09.  

The current account deficit may spur observers to reconsider what it meant by the yen's safe haven status.  While some speculators may buy yen on risk-aversion, we have argued the real driving force emanates not form this but from the reluctance of the famous Mrs. Watanabe to recycle Japan's capital account, which we would show including the investment income surplus, in periods of high financial stress.  

US data today includes the ADP jobs and benchmark revisions.  This reporting is stealing some thunder from the monthly BLS report.  However,the PSI outcome threatens to overwhelm everything else.  The consolidative tone is likely to continue through North America today, pending new developments.