Markets Build on Yesterday's Dramatic Recovery

Global capital markets staged an impressive recovery after the initial reaction to the failure to freeze oil output sent reverberations through the oil markets, commodities, and Asian equities. The sharp reversal begun in Europe and extended in North America has been sustained.

Oil prices remain firm. Perhaps the realization that the labor dispute in Kuwait has reduced output by as much as 60% (to 1.1mln barrels a day) helped underpin prices. The fall in output may be of greater immediate significance than a freeze.

Asia shares played catch-up today. The MSCI Asia-Pacific Index gained 1.8% to a new four-month high, totally recouping yesterday's 1.5% drop, which snapped an eight-day advance.  The Nikkei rallied 3.7% to return to striking distance of the 17000-17300 cap that stands in the way of a return to 18000.  

The dollar built on yesterday's recovery against the yen.  For the third time this month, the dollar pushed near JPY107.70 yesterday in the initial reaction to the failure at Doha, the plunge in Asian equities and the lack of support for Japanese intervention by the G20.  However, by midday in North America yesterday, the greenback recovered to JPY109.  It has edged toward JPY109.25 today. Additional gains that push the dollar above JPY109.75 would strengthen the case we sketched last week of the dollar carving out a low against the yen.

European stocks are extending yesterday's recovery.  That recovery was very constructive from a technical perspective.  After initially falling almost 2% yesterday, the Dow Jones Stoxx 600 managed to finish nearly 0.5% higher and above the high set before the weekend.  Near midday in London, it is up 1.25%, led by telecoms and consumer staples, though all sectors are higher.  It is at new highs since early-January.  Some favorable earnings reports provided additional grist.  

After reaching a low near $1.1235 on April 14, the euro has been gradually recovering, and for the third session, is recording higher highs and higher lows.  It is knocking on a band of resistance that extends from $1.1350-$1.1380.  Overcoming this area would put the single currency on course to retest the year's high set last week near $1.1465.  However, given the proximity of Thursday's ECB meeting, where Draghi has an opportunity to push against the euro's appreciation may deter the establishment of new euro longs.  

The news stream is light, especially given the dramatic price action.  There were three developments in the Asia-Pacific region.  First, Japan's Finance Minister Aso was still complaining about abrupt moves in the foreign exchange markets and suggested various measures could be used to counter the rapid movement, if necessary.  One may be tempted to conclude that since not such action has materialized, they are not yet necessary.  Aso seemed to hint at a BOJ response.  It is the finance ministry that orders intervention, so Aso's call on the BOJ needs to be seen as a call on the central bank to counter.  The BOJ meets at the end of next week (April 27-28).  

Second, the minutes from the recent Reserve Bank of Australia meeting contained a mild tweak.  The central bank referred to its monetary stance as "very accommodative" as opposed to "accommodative" previously.   This was understood to further reduce the chances of a cut next month, which previously had been the subject of speculation.   

The Australian dollar staged an impressive recovery yesterday.  After briefly dipping below $0.7600, it finished the North American session near $0.7750.  Today it poked through $0.7800 for the first time since last June.   The next immediate technical target is near $0.7850, which corresponds to retracement objective of the slide that began in mid-2014.  

Third, the central bank of South Korea kept steady, like many expected.  The won extended its gains to its strongest level since last November, up 1.25% on the day and 3.2% for the year.    The strength of the yen had helped give it scope to appreciate without out losing competitiveness and at the same time the strength of the yen may have encouraged Japanese asset managers to buy Korean equities. The lion's share of the net foreign buying of Korean equities this year has taken place this month, according to Bloomberg data ($1.18 bln here in April vs. $1.9 bln year-to-date).

In Europe, two developments stand out.  First, the ECB's Bank Lending Survey found that lending to businesses improved and attributed the credit to its stimulative measures.  It reported that lending standards relaxed while demand increased.  While demand for mortgages increased, lending standards had unexpectedly tightened.  The ECB concluded that banks had used the extra liquidity generated by the central bank’s asset purchases to boost lending.  

The survey gave the ECB an opportunity to evaluate its efforts until now.  It found that the asset purchases are having a negative impact on bank profitability (over the past six months).  The negative deposit rate did encourage lending, especially to households, while negatively impacting net interest income and loan margins.  

The second development in Europe was the German ZEW survey.  The assessment of current conditions fell for a third month.  The median forecast called for little change. Instead, it fell to 47.7 from 50.7.  However, the expectations component rose more than anticipated, and at 11.2 is at the best level thus far this year.  It bottomed at 1.0 in February.  There was not much of a market reaction, but the remained firm.  

The US session features March housing starts and permits.  Starts are expected to have softened in March after increasing 5.2% in February.  Permits, which are part of the leading economic indicators, fell 3.1% in February and are expected to have rebounded in March.   The Federal Reserve is entering its quiet period ahead of next week's FOMC meeting.  The US is still in the middle of earnings season.  

Canada reports retail sales and consumer prices at the end of the week.  The Canadian dollar is the second best major currency this year.  It has appreciated by 8.5%, compared with the yen's nearly 10% gain.  However, the contrast between the Canadian response and the Japanese response is stark. Whereas many Japanese officials are worried, Canadian officials have had opportunities to protest and they haven't.  Yesterday, Bank of Canada Governor Poloz was explicit.  He was not concerned about the recent strength of the Canadian dollar.  Instead, he suggested that volatility in the emerging markets was the biggest risk.  

In the initial move yesterday, the US dollar rose to CAD1.30, an important technical area and also corresponds to the 20-day moving average.  The US dollar reversed lower and fell through the pre-weekend low near CAD1.28.  The greenback's losses have been extended to just beyond CAD1.2750 today.  The CAD1.2675 area, which is retracement objective of the US dollar's rally from 2011 through earlier this year, is the next important technical target.  

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