The Euro Soars on Successful Auctions
Global Equity markets moved higher this week as a combination of solid earnings, better than expected economic data, and successful debt auction in Europe, drove markets higher. Commodities were mixed, as precious metals were hit hard at the end of the week, after the Chinese central bank announce an increase of lending requirements by 50 basis points. For the week, the DAX and the CAC lead the markets higher with returns of approximately 2%, while the FTSE and the Nikkei were basically unchanged. The S&P 500 Index was higher by 1.7%.
Auction Success, Leads to Euro Euphoria
There are two forces at working helping to push the euro higher this week. The first is ECB hawkishness and a measure of optimism regarding the peripheral countries within the European Union. European Central Bank leader Trichet’s hawkishness stance is having a strong impact on the Euro as headline euro zone inflation is making investors perceive that a tightening in rates is more likely that another round of quantitative easing. EMU CPI rose 2.2% y/y in December. German 2-year yields jumped during the week and are at the highest in almost a year. The 2-year US-German spread is now 55 basis points which is the highest since late November.
The European Commission believes that the European governments could decide on an EFSF overhaul in time for the February 4 summit. These are the funds that are allotted for bailout of countries within the EMU. There is a chance that EC governments drag their feet given the recent euphoria surrounding the successful debt auctions from Italy, Spain, Portugal and Hungary.
Early in the week, Japan Finance Minister Noda expressed the desire to purchase EFSF debt, not individual sovereign paper. Referring to the upcoming planned EFSF issuance, he said “It’s appropriate for Japan to make a contribution as a leading nation to increase trust in the deal. We want to buy more than 20%”.
The auction from Portugal on Wednesday started the Euro rally, and Spain and Italy followed on Thursday. Over the week, the EUR/USD rallied more than 4.5 big figures from 1.29 to 1.3370. The currency might continue to have technical buying if it is able to close above the 1.3490 resistance level.
The move in the Euro, which is also a change in the dollar is effecting oil prices which have run up to the $90 dollar level. A further increase in petroleum prices are likely to take a toll on future growth projections.
Asia Continues to Show Strength
Monetary tightening was a constant these during the week within the EM. The week started with a increase from Korea and ended with a hike from China. The PBOC hiked reserve requirements another 50 basis points today, effective January 20, and has hiked a total here of 350 basis points since the beginning of January 2010. The PBOC tightening cycle in 2006-2007 saw a combination of reserve requirement hikes, policy rate hikes, and CNY strength, and that’s what we are likely to see in 2011 as well.
Economic data looks strong in Asia. India WPI jumped to 8.4% y/y in December from 7.5% y/y in November, and points to another likely hike by the RBI when it meets January 25 as price pressures remain an ongoing issue. Indonesia central bank Governor Nasution also made hawkish comments and appears to be preparing the markets for a rate hike. Coming after BOK and BOT hikes earlier this week, all these developments in EM underscore that wider interest rate differentials will continue to encourage inflows into EM and that policy-makers will continue to try to manage the resulting currency gains.
Commodities are Mixed:
Commodity prices were mixed this week, as petroleum moved higher and precious metals moved lower. The continued floods in Australia, continued to put upward price pressures on coal and grain products. Over last weekend, BP announced that the Transatlantic pipeline needed to close due to a leak. It took approximately a week before the line was reactivated, which generated upward price pressures on oil and gasoline.
Next Week the Markets Will Be Watching:
- Monday Japan Consumer Confidence (500 GMT)
- Tuesday Japan Industrial Production (430 GMT), UK CPI (930 GMT), BOC Interest Rate Decision (1400 GMT)
- Wednesday UK Claimant Count (930 GMT), US Housing Starts (1330 GMT)
- Thursday Chinese GDP, CPI, PPI, Retail Sales, Industrial Production (200 GMT)
- Friday UK Retail Sales (930 GMT), Canadian Retail Sales (1330 GMT)
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