NBK Weekly Money Markets Report 31/01/2010
The Greek’s debt crisis woes and the comeback of risk aversion provided support for the US Dollar this week. Euro suffered as markets focused on Greece’s ability to survive the crisis and the potential similar scenario in Europe’s other weak economies such as the Spanish and the Portuguese ones. The Euro weakened progressively during the week, starting above the 1.41 level before closing on Friday at a low of 1.3863. Similarly, the Sterling Pound performance was erratic during the week, where the British currency range-traded between the 1.61 and 1.63 levels before closing down at 1.5986 on Friday after the US GDP figures. The Japanese currency was hit during the first trading days after the outlook downgrade for Japan; the Yen started the week at 90.24, strengthened to 89.14 on Wednesday before paring again its gains on Friday and closing at 90.27.
Disappointing Housing Sector Performance
Sales of existing US homes plunged by -16.7% in December after a hike of 7.4% in the previous month, where first-time buyers benefited from the government tax credit program. Existing home sales came at 5.45 million on an annualized basis. On another front, the S&P/Case-Shiller home price index showed a 0.2% increase in November - the sixth consecutive gain. On a year-on-year basis, prices are still down -5.3%, compared to the previous monthly figure of -7.2%. Finally, sales of new homes added to the signs that government support is causing swings in the performance of the housing market; new home sales fell by -7.6% last month versus a consensus of an increase of 3%.
Consumer Confidence Edges Up
The Conference Board’s confidence gauge rose in January from 53.5 to 55.9, the highest level in more than a year. Consumer confidence is still hindered by the high unemployment rate, currently at 10%. In parallel, the University of Michigan Survey, another widely used indicator for consumer sentiment, came at a 2-year high of 74.4, up from 72.8 in the previous month.
Fed Maintains Low Interest Rate Policy
The US Federal Reserve on Wednesday maintained its current 0-0.25% interest rate policy and hinted that rates will remain low for an extended period as inflation remains subdued. The committee also affirmed its $1,750bn programme of bond purchases would be completed in March. The meeting marked the first dissenting vote in a year as the decision of keeping rates steady came at 9-to-1; member Thomas Hoening supported his “increase rates” vote by stating that financial conditions changed sufficiently to keep rates at the current exceptionally low levels. This vote sparked a selling in the short-term US treasuries.
Bernanke Remains as Fed Chief
Ben Bernanke won a confirmation vote in the US Senate on Thursday for another 4-year term as Chairman of the Federal Reserve. The vote witnessed a debate that underscored the political and economic challenges that lie ahead. The Fed chief suffered the biggest show of dissent since voting on the position began more than 30 years ago: 30 senators, both Democratic and Republican, voted No and 70 voted Yes. Non-supporters critics questioned Bernanke’s approach to regulation, consumer protection, transparency and independence.
Economy Grows Further
The US economy grew in the 4th quarter of 2009 at an annualized rate of 5.7%, the fastest pace in six years, exceeding market consensus of 4.7%. Consumer spending, which accounts for about 70% of the US economy, rose at 2% annual rate last quarter after increasing at a 2.8% pace in the 3rd quarter. Growth was partly boosted by a sharp slowdown in the pace of inventory liquidation, a factor that could mask the strength of the economic recovery. Business inventories fell only $33.5 billion in fourth quarter after dropping $139.2 billion in the July-September period.
Greece’s Debt Crisis Emerges
Adding to the increased worries about the risk of default in Ireland, Portugal and Spain, Greece came under pressure as markets questioned its ability in meeting its obligations. The week started with a sale of EUR 8 billion of Greek Treasury bonds at premium yields to attract global lenders. The situation remains unclear as contradictory comments keep emerging. Shortly after the bonds issuance, news indicated that China refused to purchase EUR 25bn of Greek debt. The Greek prime minister later on Thursday denied that his government had sought financing from China and assured that he had not and will not seek financing from France, Germany or the European Union (EU). On the same day, high-level EU officials signaled that they would help as a last-resort backing for Greece; the officials said the EU would not abandon Greece and let Athens’s debt crisis jeopardize the Eurozone. In the UK, Alistair Darling said Britain will not join any European effort to bail out Greece, but pledged not to use differences in global financial regulations to promote the city of London.
Eurozone Economic Sentiment
Economic sentiment in the Eurozone is continuing to improve at a sustained rate, according to a closely watched monthly survey released on Thursday, but worrying divergences are emerging between the region’s healthiest and weakest economies. The European Commission’s “economic sentiment indicator” rose for a tenth consecutive month, up 1.6 points to 95.7, edging towards the long-run average of 100.
Unemployment Steps Higher
Unemployment in the Eurozone rose to 10.0% in December, up from a revised level of 9.9% in November. The European region is suffering a divergence in employment rates among its members: unemployment for Italy and Germany came at 8.5% and 7.5% respectively, while France and Spain figures came at 10.0% and 19.5%.
Economy Emerges From Recession
The UK economy returned to growth in the 4th quarter of last year after the deepest recession since records began. The economy grew 0.1% in the final 3 months but was well below the 0.4% expansion expected by analysts and by an even more optimistic forecast from the Bank of England. Both the service and industrial output grew during the last quarter; however, activity in the construction industry was flat.
House Prices Rise Sharply
The Nationwide house price index for January surged 1.2%, showing a year-on-year gain of 8.6%. The UK house prices are posting strong gains after weak advances at the end of last year, with year-on-year gains approaching double-digit territory. The figure came significantly above the market consensus of a modest 0.3% increase.
Bank of Japan Holds Rates
The Bank of Japan held the overnight lending rate at 0.1% and said it remains committed to fighting deflation as gains in the yen risk choking off the recovery from the country’s worst post-war recession. Later on the same day, Japan’s credit rating outlook was lowered by S&P, highlighting concerns about the falling prices and the strengthening yen.
Consumer prices in Japan fell at a record pace in December, prompting the government to reiterate its call for the central bank to step up its fight against deflation. While the year-on-year fall in prices slowed from -1.9% in November to -1.7% last month, the core inflation, which excludes fresh food and energy prices, dropped by -1.2% in December from a year ago, the biggest decline since records began in 1971.
Unemployment Keeps Falling
Unemployment in Japan fell in December to 5.1% from 5.2% in November, better than the forecasted figure of 5.3%. Unemployment in Japan decreased progressively during the second half of 2009 from its 5.7% peak in July.
India Raises Banks’ Cash Reserve Ratio
India’s central bank took further steps to unwind the loose monetary policy it adopted during the global financial crisis, a sign of the gathering recovery across Asian economies. China had already raised its equivalent ratio earlier this month. The Reserve Bank of India announced a higher-than-expected 75bps rise in the cash reserve ratio, or the proportion of deposits banks must keep with the central bank, to soak up excess liquidity.
Dinar at 0.28760
The USDKWD opened at 0.28760 on Sunday morning.