Memorial Day Update

The US dollar is broadly lower in relatively subdued activity. The major development over the weekend that has encouraged some reduction of risk averseness is several polls in Greece that showed the New Democracy pulling ahead of Syriza. Global equity markets are mostly higher, with the MSCI Asia Pacific Index gaining about 0.75% and the most European bourses are up the same or more.

Spain’s IBEX is the exception to the generalization. Modest losses are being recorded, with the financials the largest drag, following news before the weekend that Bankia needs not 4.5 bln euros, 9 bln euro, or even 15 bln euros that had been hinted at, but rather 19 bln euros.

Fresh developments on the ground are light today and largely limited to BOJ minutes from the April meeting which saw a small tweaks in the asset purchase plans, but more concern from board members that the central bank ought not be seen monetizing the government’s debt. Japan also reported April service prices, which were flat, but still posted the first year-over-year increase 3.5 years. 

Italy raised about 3.5 bln euros by selling debt. It was forced to pay higher yields, reflected the heavier tone in the secondary market. Separately, it reported erosion in business confidence, which follows the poor consumer confidence report last week.

In addition to the Greek polls, there were a few polls of note. First, in the parliamentary elections next month in France, the center-left parties appear to be doing well. There has been some suggestion that the UMP may join forces with Le Pen, but the rank-and-file apparently are less keen. Second, a poll in the Netherlands warns that the 5 parties that supported austerity are beginning to be punished by waning support. The election is not until mid-September, but opposition to further austerity appears to be growing in this country that has insisted an austerity elsewhere. 

 Third, a poll in Germany saw a large one week shift against Merkel’s CDU. The gap between the CDU and SPD now stands at about 2 percentage points. Domestic political concerns are often an unspoken influence on Merkel’s European stance. Fourth, the latest reports suggest that Ireland approve of the fiscal pact at this week’s referendum.

The New Zealand and Australian dollars are benefiting the most from the easing of risk aversion. Both are up nearly 1.2% near midday in London. They had been beat up the most in recent sessions and the recovery looks corrective in nature. The euro and sterling over above last Friday’s highs, but follow though buying was limited. The euro ran out of steam near $1.2625 and sterling near $1.5720. The yen remained firm, despite the corrective pressures and losses on most of the crosses, the greenback slipped to about JPY79.35.

The highlights of the week ahead include PMI readings, the Irish referendum, and expected 50 bp cut in the Selic rate by the central bank of Brazil and US employment figures. The US employment figures may take on extra significance ahead of the June FOMC meeting where there is still some speculation of another round of asset purchases. Recall that April job growth was the weakest in six months. The early (prior or ADP estimate) is for 160k private sector jobs after 130k in April. A significantly worse report could fan expectations, especially after the University of Michigan consumer confidence report showed a decline in 1 and 5 year inflation expectations. On balance, we continue to expect some compromises to be worked out that keeps Greece within monetary union and we do not expect the FOMC to announce QE3.