A couple of
boosts to sentiment from the northern hemisphere last night helped equity
markets rally back through key levels. The US Government agreed to bail out Citigroup
last night, providing USD27 billion of capital and guaranteeing $306 billion of
their assets. US equity markets, desperate for good tidings, rose to see the
Dow above its key 8000 level; it is currently at 8290, a 3% gain. In the UK, a stimulus
package included a 2.5% cut to VAT (a similar tax to NZâ€™s GST), to which the UK and European
equity markets responded by rallying around 10%. Negative news, such as a 3.1%
fall in US existing home sales and the lowest German business climate reading since
1993, failed to dampen the short-term sentiment.
The NZD followed the
leads of the US and UK, and broke out of its 0.5300 to 0.5350 range last night,
quickly moving to a high of 0.5477. It is currently around 0.5440. News on the
local front remains negative in tone, with the rural sector expecting lower
earnings from dairy and meat this season. Todayâ€™s RBNZ inflation expectation survey
will be watched for any sign of disinflation, although we expect the number to
remain at last quarterâ€™s level of 3.0.
The AUD outpaced NZDâ€™s
move, moving from 0.6255 to 0.6507 in Europe, and is
currently sitting at 0.6485. The 0.65 level should provide some short-term resistance.
The AUD/NZD cross rate benefited from this out-performance, moving from
yesterdayâ€™s 1.1775 to a recent high, slightly above 1.19.
reduction in global risk aversion helped EUR rally in
non-stop fashion throughout the European session, from around 1.26 to 1.29. The
poor German IFO reading, though, may see a lack of follow through in this
currency, given there is now more pressure on the ECB to cut rates
aggressively. The UK stimulus
GBP from around
1.49 to above 1.5150, before retreating slightly to around 1.51.
currently acts as a risk aversion indicator, moved in converse fashion, with the
USD/JPY rate moving from around 95.50 to just under 97.
existing home sales fell 3.1% in October, following a downwardly-revised 4.7%
gain in September. Monthly sales have held to a remarkably narrow range over the
last year, as prices have borne the brunt of the correction â€“ the median sale
price is down 11.3% on a year ago, and down more than 30% in some boom cities.
There is increasing evidence that existing home sales are cannibalising new
home sales (to be published on Wednesday night).
industrial orders fell 3.9% in September, following a 1.5% drop in August.
Orders for transport equipment declined 3.8%, reflecting the weakness in the
German Ifo survey fell heavily again in November, reaching a
16-year low of 85.8. The expectations component dropped to 77.6 from 81.4,
despite ECB rate cuts and official efforts to prop up the banking system since
the previous survey. The survey showed an erosion in confidence across the
board, with the retail sector the most pessimistic.
Pre-Budget Report detailed a fiscal stimulus package worth Â£25bn over
the next two years, equivalent to 1.1% of GDP. The Bank of England cited the potential
for a significant amount of stimulus from this report as a reason for cutting the
policy rate by â€˜onlyâ€™ 150bps earlier this month. UK Chancellor
Darling said that he expects the UK economy to
shrink by 0.75-1.25% next year.
new-found optimism in major equity markets may or may not be sustained beyond a
few days. Regardless, NZDâ€™s 54 cent level is a key one, and last nightâ€™s price
action must be respected. For today, 54 cents is the floor, with a ceiling at
55.5 cents. Equity markets will continue to lead currencies, and the Dow must
remain above 8000 over the next few days to provide any confidence the NZD has
found a medium-term bottom.
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