Market Finds Fragile Balance

The financial markets have found semblance of order.  The US dollar is mostly softer, but as we have argued in recent days, the main axis in the capital markets is the yen.  The yen was sold in Tokyo and JGB yields fell back.  The dollar has dipped below JPY96.00 in thin pre-Asian trading following the tragedy in Boston, the recovered to around JPY97.70 before the European session began.  

It has not made much headway in the European morning, but has held above JPY97.50.  At the same time, the 10-year Japanese yield, which essentially doubled, from almost 32 bp on April 5th the day after the BOJ, to 65 bp yesterday, eased today, slipping 6 bp.  The 5-year note auction saw the lowest bid-cover in nearly 18 months.  

This coupled with the fact that the weaker yen did not translate into equity market gains, illustrates the fragility of conditions.  That said, we note that technically, Japanese stocks look constructive.  The Nikkei gapped lower and spent most of the session rising, to close the gap, and finish near session highs. 

The corrective forces are evident in other markets as well.  The price of gold is about 3% higher.  Most of the other major and emerging market currencies are firm.  Equity markets remain, though, as was the case in Japan.  The MSCI Asia-Pacific Index is off about 0.4%.  The Dow Jones Stoxx 600 is off 0.65% near midday in London.   They also had to cope with news that the German ZEW survey was considerable weaker than expecting, casting doubts on the strength of the German recovery.  

The April ZEW survey showed the current assessment deteriorated to 9.2 from 13.6.  The consensus had expected improvement.  The economic sentiment reading fell more than expected--to 36.3 from 48.5.  We often find that the ZEW results seem to be sensitive to the performance of the DAX, which we note is off 4% in the past month, without including today's performance. 

The UK's inflation reports (PPI and CPI), were largely in line with expectations.  Among the major economies, the UK's inflation appears to be the stickiest.  CPI rose 0.3% in March for a 2.8% year-over-year pace.  It has been 2.7%-2.8% for half a year.  The euro area's harmonized measure was also reported today.  It stands at 1.7%.  The US will report its March CPI later today and it is expected to have risen 1.6% from year ago levels.  Japan, Switzerland and Sweden are experiencing deflation. 

The minutes from the BOE's meeting earlier this month will be reported tomorrow.  Governor King has voted with the minority at the previous two meetings, in favor of a resumption of gilt purchases.  We suspect neither the three dove nor stand patters change their views.  At the same time we note that one of the reasons highlighted reluctance of the majority to support a new round of gilt purchases was fear that sterling would depreciate.    On the BOE's broad trade weighted measure, sterling has risen about 3.3% over the past month. 

Minutes from the Reserve Bank of Australia's meeting were released and the tone and substance seemed little changed.  Thee is scope for additional easing if necessary, but no urgency.  The Aussie's gains today are not so much a reaction to the minutes, but to general corrective forces that have lifted the dollar-bloc.   Last Thursday, the Australian dollar was approaching $1.06 and yesterday had dipped below $1.03.    The first retracement level comes in near $1.04.  The Canadian dollar's drop was not as dramatic and the first retracement objective for the US dollar comes in near CAD1.0190. 

Lastly, we note that despite reporting disappointing data, China is still allowing the yuan to grind higher.  It made a new 19-year high against the dollar after official set a high fix for it (lower for the dollar) for the third day running.  The reserve data, that showed nearly the same rise in Q1 as for all of 2012 highlights new capital inflows.  However, the suspicions over the dramatic jump in exports to Hong Kong and Taiwan,  may mean that some of the inflows are Chinese businesses themselves.  

In any event, the point is that the yuan's appreciation appear to be a reflection of capital flows.  It is true that the G20 will convene later this week, but to attribute the yuan's gains to window dressing ahead of it, does not do justice to the steady grind higher for the mast two months.  In addition, given the disappointing data, the cuts in GDP forecasts and Moody's reduction in its outlook for the sovereign rating from positive to stable, could have provided easy cover to weaken the yuan today.