Weekly Radar: Currency warriors meet in Moscow

February 7, 2013


Hiccup. February has so far certainly brought a more sober, if healthier, perspective to world markets. Global stocks are off about half a percent this week, letting the air out gently from January’s over-inflated 5 percent surge. The focus is back on Europe, where the threat of a euro FX overshoot (in the face of LTRO paybacks and rising euro interest rates alongside stepped-up “global currency wars”) has fused with a plethora of unresolved national debt conundrums and a stream of ‘event risks’ on the region’s calendar. Euro stocks have retreated to December levels as the currency move and fresh political angst has taken the wind out of earnings and growth projections after such a steep rally over the past six months. Name anything you want – the tightening race for this month’s Italian elections and Monte di Paschi scnadal there, a delayed Cyprus bailout and elections there this month, the Irish promissory note standoff with the ECB etc etc – when things turn, they all these get amplified again even if none really are likely to be systemic threats in the way we’d become used to over the past two years. The slight backup in Italian/Spanish yields to December levels shows sentiment turns still pack a punch, the European earnings season has been mixed so far, there are political murmurs about capping the euro and the political calendar over the next six weeks is a bit of a minefield for nervy markets. All the issues still look resolvable – the tricky Irish bank debt rejig looks on the verge of a resolution; few still believe Berlusconi be the next Italian PM (only 5 percent on betting website Intrade think so, for example); and Cyprus is expected by most to get bailed out eventually. Today’s ECB will be critical to most of those issues, but next week’s euro group gets a chance to update everyone on its role in them aswell). The issue likely to gnaw deepest at investors is the regional growth outlook  and,  in that respect, the euro surge is about as welcome as a kick in the teeth at this juncture. (Euro Q4 GDPs out next week). The French clearly want to rein in the currency but don’t have the tools or the German backing. Draghi and the ECB will likely have to come to rescue again, though he will not admit to euro targeting and so may drag his feet on this one until the move starts to burn. Interesting times ahead and interesting G20 finance meeting in Moscow next week as a result.

To keep this week’s market wobble  in Europe in perspective, however Wall St still continues to hover close to record highs as the Q4 GDP shock was probably correctly dismissed as a red herring; Japan’s TOPIX is now up 35% in three months (well, about 15% in euro terms), and Shanghai is up 18% in just two months. It’s curious to note that Shanghai was the top pick of the year when Reuters polled global forecasters in December and average gains for the whole of 2013 were expected to be… 17 percent. So, stick with the growth and the currency printing regions for now it seems – even if you do get whacked on the exchange rate.

So while a market pause at least has been well warranted, the big 2013 theme of a long-term investor retreat from core debt and re-allocation toward  equity will likely prevent major corrections as long as the underlying global growth story – modest as it is – holds up and builds some steam. ANd that is a long-term story and won’t be decided over a week or even a few months. US Treasury auctions next week may be the ones to watch in that regard.



UK/Swiss January inflation Mon

Euro group Mon

Indonesia rate decision Tues

Europe Q4 earnings Tues: ThyssenKrupp, Barclays, Glencore etc

ECOFIN meeting Tues

EZ Dec industrial production Tues

Swedish rate decision Tues

ECB’s Draghi in Madrid Tues

US 3-year Treasury auction Tues

US Obama State of the Union Tues

Europe Q4 earnings Weds: ING, SocGen, Peugeot etc

Italy govt bond auction Weds

US Jan retail sales Weds

US 10-yr Treasury auction Weds

SKorea rate decision Thurs

Japan Q4 GDP Thurs

BOJ decision Thurs

EZ/Germany/France/Italy Q4 GDP Thurs

Europe Q4 earnings Thurs: ABB, BNP Paribas, Nestle, Rio Tinto etc

UK gilt auction Thurs

US 30-yr Treasury auction Thurs

G20 finance ministers and central bankers meet Moscow Fri/Sat

UK Jan retail sales Fri

US Jan industrial output Fri

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