It felt that markets were desperately trying to put the past couple of weeks behind them during Tuesday, with some proving to be more successful than others. The biggest snap-back has been in underlying volatility, with the VIX equity volatility index pushing back towards to within a whisker of the 20 level, above which it has closed consistently for nearly two weeks now. There was also a sharp fall in implied volatility in the FX markets, especially on EUR/JPY where, in the wake of last Friday’s coordinated intervention on the part of G7 central banks, a certain calm is prevailing. This reflects the view that, after the initial intervention (which was not that dramatic, especially from the non-Japanese central banks), there is not going to be much in the way of concerted follow-through. Naturally, the easing of tensions around the nuclear facility is also proving to be supportive at the margins. However, many risks remain, both around Libya and Japan, not least with future energy supplies, so some caution is still warranted, with the assessment of the macro impact of events in Japan still very much in its infancy.
Guest post by FxPro
Commentary
Portugal budget vote looming large. A crucial budget vote takes place today, which could see the government calling early election, with the likelihood of an EU bail-out moving to a near certainty as a result. This threat has been one of the factors weighing on the euro at the highs, together with the approach of the EU summit this coming weekend. On Portugal, the austerity measures are designed to fit Portugal into the stability and growth program of the EU. At present, the vote appears to be a close call, but the euro will be vulnerable to a rejection, especially with the focus falling firmly on the fiscal side and further agreements on the current lending facility at this weekend’s summit.
UK inflation up but cost of drowning sorrows falls. The jump in UK inflation to 4.4% in February, from 4.0% in January, was firmer than expected and continues the strong tendency for UK CPI to surprise to the upside. The data suggest that the January VAT increase, which was clouded by seasonal discounts during January, has been a vehicle for retailers to push through other cost increases. This is reflected in the record January and February monthly increases in prices for clothing and footwear between of 3.6%. The other strong updraft came from the housing and household services element, much of which was driven by rising fuel prices, with most of the upward pressure coming from gas. Also worth noting, between January and February it became 2.4% cheaper to drown your sorrows at the rising prices elsewhere. Overall, the inflation data is likely to keep the Bank of England on a tightening path, with May still looking the more likely time for interest rates to be nudged higher. Sterling has further benefitted from the CPI numbers, having pushed decisively above the 2010 high with cable at 1.6300 and reversing the week-long losing streak vs. the EUR.
UK budget statement should be fairly constrained. After the last budget statement in June 2010, sterling was one of the best performing currencies in the following week, on the back of the fiscal austerity measure announced which swept aside fears that the UK’s credit rating may be under threat. A similar reaction looks unlikely this time, with the budget statement likely to be limited to minor tinkering around the edges of his plan to reduce the structural deficit to zero by the year 2015.
Fed sending big cheque to the US Treasury. The word ‘bail-out’ is overused. Many of the measures taken by government and central banks were not strictly bail-outs at all. This is why the US central bank managed to make a handsome ‘profit’ last year, net income rising to over USD 80bln, slighthly better than the preliminary figures released in January. Most of this resulted from the purchase of distressed assets, especially mortgage backed securities. As QE2 trundles along, the US Fed has gained an even much greater stock of government bonds. These are unlikely to bring the same windfall. Indeed, there is even the risk of loss should the bond market sell-off sharply in the face of an economic recovery, but a lot of this depends on if and when the Fed decides to start selling its portfolio back to the market. Not a bit story for FX, but still worth bearing in mind.
Looking Ahead
Wednesday: UK: MPC Minutes, budget statement; EC: Industrial New Orders, January (previous 2.1% MoM and 18.5% YoY); Eurozone Consumer Confidence, March; US: New Home Sales, February (expect 295K, previous 284K).
Thursday: JPN: Merchandise Trade Balance, February (expect JPY709bn, previous JPY192bn); FR: Business Confidence, March (previous 106); GER: PMI Manufacturing, March a (expect 62.0, previous 62.7); PMI Services, March a (expect 58.1, previous 58.6); EC: PMI Manufacturing, March a (expect 58.2, previous 59.0); UK: Retail Sales, February (expect -0.5%, previous 1.9%); US: Durable Goods Orders, February (expect 1.0% MoM, previous 2.7%); Initial Jobless Claims (previous 385K); Bloomberg Consumer Comfort.
Friday: FR: Consumer Confidence, March (previous 85); GER: GfK Consumer Confidence, April (expect 5.8, previous 6.0); IFO Business Climate, March (expect 110.5, previous 111.2); US: GDP, Q4 revision (expect 3.0% SAAR, previous 2.8%).
Source: Bloomberg
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