Markets Watching Summit of EU Leaders

March 25, 2011

Commodity currencies fell Friday after rising Thursday.  New Zealand, Australian and Canadian dollars are 0.5%, 0.3% and 0.2% lower.

A carry trade-friendly environment in which low-yielding currencies fund such positions is taking shape.  The U.S. dollar rose 0.6% against the Swiss franc and 0.4% relative to the yen.  The dollar elsewhere is up 0.1% against the euro and unchanged relative to sterling and the yuan.

Stocks are performing nicely today, with gains of 1.1% in Japan and Hong Kong, 2.5% in India, 0.9% in Australia, South Korea, Singapore and the Philippines, 1.3% in China, and 0.4% in Taiwan.  The German Dax, British Ftse and Paris Cac are so far up 0.7%, 0.6%, and 0.4%.

The 10-year German bund and Japanese JGB yields firmed by three and one basis points, while British gilts fell two basis points.

Having set a new record high earlier this week, gold eased 0.1% to $1433.10 per barrel. Oil firmed 0.2% to $105.76 per ounce.

Following a similar move by Fitch yesterday, S&P has downgraded Portuguese sovereign debt by two notches to a rating of BBB from A- and retained a negative outlook.  A Portuguese bailout is thought likely to cost about $100 billion.  Doing the same for Spain, the next logical domino, would be infinitely more expensive.  In other EU developments, leaders continue to meet in Brussels in an effort to find a common ground on a bailout mechanism, but German demands remain an impediment to progress.  A regional election loss by the CDU in Baden-Wuerttemberg would cost Germany’s ruling coalition control of the upper house Bundesrat in Germany’s national parliament.

News from the Japanese damaged nuclear energy facility at Fukushima has not been good.  It seems that the core in reactor #3 is oozing radiation, and people within 30 km of the area are being urged to move further away.

Nato was given formal responsibility for directing allied operations in Libya, but it will take some time for that order to become an operational reality.

Japanese seasonally adjusted consumer prices rose 0.2% on month and were unchanged in February from a year earlier.  The core CPI, which excludes just seasonal food, was 0.3% lower than a year before, and the ex-food & energy index (core core) was down 0.6% on year.  Tokyo seasonally adjusted consumer prices fell 0.3% on month in March and was also 0.3% lower than a year earlier.

Japanese corporate service prices rose 0.3% on month but fell 1.0% on year in February.  The year-over-year drop was somewhat less than forecast.

Japanese stock and bond transactions generated a JPY 795 billion capital inflow last week.

The German IFO measure of business climate slid by 0.2 to 111.1 in March, the first drop in ten months but still a pretty robust level.  Current conditions improved but expectations were depressed after news of Japan’s massive earthquake.  The IFO services climate index weakened to a reading in March of 28.0 from 33.0 in February.

German import prices posted their fourth straight on-month increase of at least 1%, rising 1.1% in February and by 11.9% on year.  Non-oil import price inflation settled back to 8.8% from 9.3% in January, however.  Export prices rose 0.4% on month and by 5.4% on year in February.

French final fourth-quarter GDP figures showed growth of 0.4% on quarter.  Final domestic demand accounted for 0.6 percentage points of growth, as personal consumption accelerated at a 0.9% pace.  Net exports also made a sizable positive growth contribution, but inventories exerted a drag of 0.9 percentage points.  French real GDP rebounded 1.5% last year after contracting by 2.5% in 2009.

French consumer confidence unexpectedly dipped to 83 in March from 85 in January and February and a reading of 86 in December.  The long-term average is 100.  Dutch consumer confidence also faded in March, printing at minus 8, three points lower than in February.

Italian retail sales fell by 0.3% on month and 1.2% on year in January.  Spanish producer prices rose 0.9% on month and 7.6% on year in February.  Swedish M2 money growth slowed to a 12-month pace of 2.0% in February from 3.8% in January.

Bank Rossii, Russia’s central bank, raised reserve requirements by 100 basis points for non-residents and 50 bps for everything else.  Such was the third straight monthly increase and was expected.  Analysts also thought a refinancing rate hike would be likely, but such was instead left steady at 8.0%.  The key interest rate was lifted 25 bps on February 25, its first increase since December 2008.  Policy has been tightened to help anchor inflation expectations.

South Korean consumer confidence worsened to a 23-month low of 98 in March from 105 in February, reflecting the Japanese earthquake in part.

Singapore’s industrial production fell 2.0% last month but was 4.8% greater than a year earlier.  In the Philippines where yesterday saw the central bank finally implement its first interest rate increase, the current account narrowed 34.4% last quarter to $2.17 billion.

The final estimate of U.S. fourth-quarter GDP gets released today.  The U. Michigan full-month consumer confidence figure is also due.  Europe moves its clocks one hour ahead on Sunday, moving to daylight savings time.  This change will restore the normal time difference of five hours between New York and London and six hours between New York and many continental centers like Brussels, Paris, and Frankfurt.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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