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Westpac Institutional Bank Morning Report 20.10.10

Fuseworks Media
Fuseworks Media
Westpac Institutional Bank Morning Report 20.10.10

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Risk markets reversed last night. Catalysts cited included China's central bank raising 1yr interest rates by 25bp to curb a housing bubble, weaker-than-expected earnings guidance from Apple, and an attempt by the NY Fed and investors to recoup $47bn of mortgage bond losses from Bank of America. Sentiment likely played a part too, with participants previously bullish most risk asset classes to record degrees. The S&P500 is currently down 1.8%. Commodities were particularly stung by the China tightening, the CRB index down 1.8%, with oil -3.5% to a fresh October low of $80 and copper -3.0%. Gold fell 2.6% to $1329, the largest drop since 1 July. US 10yr treasury yields benefited from the risk aversion, shedding 4bp to 2.46%. A plethora of Fedspeak from dovish Dudley and Evans, Kocherlakota and hawkish Fisher suggested debate regarding further QE, although note the latter is a non-voting member.

The US dollar index bounced 1.4% from an oversold level. EUR fell from 1.3950 mid European morning to 1.3720 on the factors mentioned above, as well as a blowout in the Eurozone current account deficit and weaker German analyst sentiment survey. USD/JPY spiked to 81.90 before returning to the 81.50 area for little net change. USD/CAD rose from around 1.0200 to 1.0375, Canada's central bank keeping rates on hold at 1.0% and sounding dovish.

AUD formed a large outside down day, falling from 0.9900 to 0.9660. NZD also made an outside down day, from 0.7565 to 0.7435, the Fonterra dairy auction result (prices down 2.5% overall) swamped by the global themes. AUD/NZD was hurt by the negative sentiment and fell a cent to 1.2990.

US housing starts up 0.3% in Sep. Single family starts rose 4.4%, their second consecutive rise after slumping 25% since the homebuyer tax credit expired in April. But multiples fell nearly 10%, though that was only a minor pull-back after the 80% multiples starts surge earlier in Q3. A 20% multiples fall also weighed against housing permits in Sep, which fell 5.6%, but single family permits rose 0.5%, their first positive since March. It is early days, but we perceive some evidence here that the post rebate housing slump has bottomed out and might even be in the early stages of reversing.

Fedspeak: Dallas Fed's Fisher - US economy expanding at near "stall speed" but "the efficiency of further accommodation using nonconventional methods is not all that clear". He remains a QE2 doubter. Chicago Fed's Evans - "price level targeting would call for a series of large scale asset purchases". Clearly the decision to go down the QE2 path will not be unanimous.

Euroland current account deficit EUR7.5bn in Aug, the largest in almost a year, and further evidence recent euro gains are impacting on export competitiveness.

German ZEW analysts' survey falls from -4 to -7 in Oct, its sixth straight decline, although the current conditions index rose from 59.9 to 72.6, its 17th straight gain.

UK CBI industrial trends survey weaker in Oct. The new orders index fell from -17 to -28. Also the quarterly business optimism survey fell from 10 in July to 2 in Oct, its second consecutive fall to its lowest in a year.

Bank of Canada on hold at 1.00%. From the statement: "The economic outlook for Canada has changed. The Bank expects the economic recovery to be more gradual than it had projected in its July Monetary Policy Report... At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered."


AUD/USD and NZD/USD outlook next 24 hours: Australia's Westpac leading index is released today and should continue to slow, albeit at elevated levels. AUD/USD's vicious sell-off last night alleviated its overbought condition but it should remain capped by 0.9850. NZD/USD support area in this downmove is at 0.7400-0.7420.

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