Weekly Review and Outlook
Dollar Rebounded, Markets Just Nervous on Greece, or Risk Market Reversing?
It looked as if risk markets started to lose momentum as Greece headed closer to securing the EUR 130b second bailout from EU/IMF. Friday's selloff in stocks could be seen as position squaring ahead of the crucial austerity package vote in Greek parliament. It could also be seen as a sign that investors were indeed looking past and jumping ahead the Greek events and reversing their positions for short term. We'd like to point out that DOW has so far failed to sustain above prior high of 12876 made in 2011 and risk of reversal is starting to build up. CRB commodity index showed sharp fall on Friday and ended the week in red. In currency markets, Euro, Sterling, Swiss Franc and Canadian dollar showed sign of short term topping against dollar. Aussie was less weak but is also vulnerable to deeper fall. The initial reaction this week to the Greek vote should reveal whether markets were just nervous ahead of the weekend, or they're reversing the underlying trend.
After marathon negotiations, Greek political leaders agreed on the austerity deal finally. But even so, EU finance ministers delayed approval of the second bailout and instead requested three more things from Greece. That include firstly pass the austerity package in parliament on Sunday, secondly find extra EUR 325m in savings for 2012, and thirdly give "strong political assurances" for continuing the reform implementation after April's general election. At the time of writing, Greece's cabinet has unanimously approved the austerity measures, which include steep cuts in private sector wages, cutting 15,000 public service jobs and adding EUR 3b of spending cuts in 2012. Greek parliament will vote on the package on Sunday. It's believed that Prime Minister Papademos would easily secure more than half of the 300 vote in parliament considering that the main coalition partners, the Socialists and the conservative New Democracy party, have a combined 236 seat majority. Greece will then submit the whole package, including the PSI debt swap deal, to EU finance ministers on Wednesday.
ECB left the main refinancing rate unchanged at 1%. Policymakers appeared to be more optimistic about the economic outlook. In the policy statement, the term 'substantial' was removed when describing 'downside risks to the economic outlook'. At the press conference, President Draghi said that 'hard' data have provided support the improved economic prospect. He also stated that the central bank was less pessimistic than the IMF's latest projections. The BOE expanded the asset purchase program by +50B pound to 325B pound and left the Bank rate at 0.5%. As mentioned in the policy statement, 'the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. While policymakers noted that 'some recent business surveys have painted a more positive picture and asset prices have risen', the pace of expansion in the country's major exporters 'has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries'. More in As Expected, BOE Added More Stimulus while ECB Stood Aside.
RBA unexpectedly left the cash rate unchanged at 4.25% in February, in contrast with consensus of a rate cut by -25 bps. The decision, in spite of growing uncertainty in the sovereign debt crisis in the Eurozone, indicated policymakers' confidence in China's demand and US' economic recovery. More in RBA Unexpectedly Paused After 2 Successive Rate Cuts. Later in the week, RBA lowered 2012 inflation forecast to 3.00%, down from prior projection of 3.25%. Underlying inflation are expected to be at 2.75%, unchanged from prior projection. However, average growth in 2012 are expected to be at 3.5%, sharply lower than prior projection of 4.00%. The forecasts are based on assumption of keeping interest rate on hold at 4.25%. Overall, RBA expect inflation to "remain around the midpoint of the target range for most of the next couple of years" and that provides “scope for easier monetary policy should demand conditions weaken materially."
Two pieces of data from China weighed down on investor's sentiments last week. CPI jumped back to 4.5% yoy. The data might reinforce officials' concern that inflation is not going away yet and could complicate the plan to add stimulus to revive growth, lowering the possibility of policy loosening. Trade surplus widened sharply to $27.3b in January. However, that's due to sharply decline in imports, by -15% to $122.7b. Export dropped -0.5% to $149.9b, continuing it's gradual down trend. Economists viewed steep decline in imports as a sign of extremely weak domestic demand.
Dollar Rebounded, Markets Just Nervous on Greece, or Risk Market Reversing?
It looked as if risk markets started to lose momentum as Greece headed closer to securing the EUR 130b second bailout from EU/IMF. Friday's selloff in stocks could be seen as position squaring ahead of the crucial austerity package vote in Greek parliament. It could also be seen as a sign that investors were indeed looking past and jumping ahead the Greek events and reversing their positions for short term. We'd like to point out that DOW has so far failed to sustain above prior high of 12876 made in 2011 and risk of reversal is starting to build up. CRB commodity index showed sharp fall on Friday and ended the week in red. In currency markets, Euro, Sterling, Swiss Franc and Canadian dollar showed sign of short term topping against dollar. Aussie was less weak but is also vulnerable to deeper fall. The initial reaction this week to the Greek vote should reveal whether markets were just nervous ahead of the weekend, or they're reversing the underlying trend.
After marathon negotiations, Greek political leaders agreed on the austerity deal finally. But even so, EU finance ministers delayed approval of the second bailout and instead requested three more things from Greece. That include firstly pass the austerity package in parliament on Sunday, secondly find extra EUR 325m in savings for 2012, and thirdly give "strong political assurances" for continuing the reform implementation after April's general election. At the time of writing, Greece's cabinet has unanimously approved the austerity measures, which include steep cuts in private sector wages, cutting 15,000 public service jobs and adding EUR 3b of spending cuts in 2012. Greek parliament will vote on the package on Sunday. It's believed that Prime Minister Papademos would easily secure more than half of the 300 vote in parliament considering that the main coalition partners, the Socialists and the conservative New Democracy party, have a combined 236 seat majority. Greece will then submit the whole package, including the PSI debt swap deal, to EU finance ministers on Wednesday.
ECB left the main refinancing rate unchanged at 1%. Policymakers appeared to be more optimistic about the economic outlook. In the policy statement, the term 'substantial' was removed when describing 'downside risks to the economic outlook'. At the press conference, President Draghi said that 'hard' data have provided support the improved economic prospect. He also stated that the central bank was less pessimistic than the IMF's latest projections. The BOE expanded the asset purchase program by +50B pound to 325B pound and left the Bank rate at 0.5%. As mentioned in the policy statement, 'the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. While policymakers noted that 'some recent business surveys have painted a more positive picture and asset prices have risen', the pace of expansion in the country's major exporters 'has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries'. More in As Expected, BOE Added More Stimulus while ECB Stood Aside.
RBA unexpectedly left the cash rate unchanged at 4.25% in February, in contrast with consensus of a rate cut by -25 bps. The decision, in spite of growing uncertainty in the sovereign debt crisis in the Eurozone, indicated policymakers' confidence in China's demand and US' economic recovery. More in RBA Unexpectedly Paused After 2 Successive Rate Cuts. Later in the week, RBA lowered 2012 inflation forecast to 3.00%, down from prior projection of 3.25%. Underlying inflation are expected to be at 2.75%, unchanged from prior projection. However, average growth in 2012 are expected to be at 3.5%, sharply lower than prior projection of 4.00%. The forecasts are based on assumption of keeping interest rate on hold at 4.25%. Overall, RBA expect inflation to "remain around the midpoint of the target range for most of the next couple of years" and that provides “scope for easier monetary policy should demand conditions weaken materially."
Two pieces of data from China weighed down on investor's sentiments last week. CPI jumped back to 4.5% yoy. The data might reinforce officials' concern that inflation is not going away yet and could complicate the plan to add stimulus to revive growth, lowering the possibility of policy loosening. Trade surplus widened sharply to $27.3b in January. However, that's due to sharply decline in imports, by -15% to $122.7b. Export dropped -0.5% to $149.9b, continuing it's gradual down trend. Economists viewed steep decline in imports as a sign of extremely weak domestic demand.
0 comments