Markets gauging Tsunami impact on Japan
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Markets gauging Tsunami impact on Japan

The unfolding events in Japan over the weekend and overnight have caused market to reassess the likely impact going forward.   The extent of the damage, combined with the problems in Japan’s nuclear industry and the associated power-cuts have knocked stocks sharply lower, the Nikkei down some 6%.   The emerging picture is of a situation worse that the Kobe earthquake of 1995. Back then, the economy was already slowing and the impact of the earthquake was to enhance this trend and bring forward rate cuts from the Bank of Japan which would have likely occurred regardless. This time around, the expectation was for the economy to strengthen after a weak fourth quarter, but that is now looking unlikely.   The Bank of Japan has stepped in overnight to inject liquidity into the money market and also expanded its asset purchase program. Overall, modest risk aversion is likely to characterise markets at least for the early part of the week, with the yen nearly 1% lower vs. the USD on the back of this morning’s re-assessment.

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European leaders go further than expected. The weekend’s summit of European leaders went further than merely looking at competitiveness issues, as was expected. Leaders agreed to an increase in the lending capacity of the European Financial Stability Facility, from EUR 250bn to EUR 440bn.   The permanent crises resolution facility, in place from 2013, is to have a EUR 500bn lending capacity. There was disappointment however. The bond-buying provision that some (including the ECB) were pushing for was weakened, allowing only the facility to buy government debt directly from governments, rather than from the open market.   Greece achieved a lower interest rate and longer pay-back period in return for more austerity measures. Ireland refused to give up its low corporate tax rate in return for a lower interest rate on its borrowing.   The euro is greeting the results with neither enthusiasm nor disappointment.

Rate-sensitive currencies on the wane. Last week was something of a game-changing week in the fx markets. It’s perhaps not a major surprise to see both the euro and sterling as the main losers in the stronger dollar environment.   Interest rate-tightening expectations have been scaled back in both, with 2Y yields down 11bp in the UK so far this month.   Meanwhile, the equivalent German 2Y yield has retraced around half of the jump higher seen in the wake of the ECB press conference last week, when the ECB President appeared to endorse a tightening of policy at the April meeting.   The other standout is the yen and Swiss franc.   Naturally, the big move on the former occurred in the wake of the earthquake, but the moves on the Swiss franc suggest that we are not in an outright period of sustained risk aversion.   For now, the asset classes to watch are bond spreads for the euro (greater sensitivity to these being seen) together with commodity prices , especially those (silver, copper) that are looking very stretched.

US retail sales and consumer sentiment. Friday’s data for the US was mildly positive, with upward revision to the January data making for a better outlook for the first quarter. The strength was down to vehicles and parts to a large degree, with the core rate rising 0.6%, from 0.5% in January.   The Michigan consumer confidence data fell back to 68.2, this largely reversing the rise to 77.5 seen in February.

Looking Ahead

Monday: EC: Eurozone Industrial Production, January (previous -0.1% MoM and 8.0% YoY).

Tuesday: FR: CPI, February (previous -0.2% MoM and 1.8% YoY); UK: DCLG House Prices, January (previous 3.8%); EC/GER: ZEW Economic Sentiment, March (previous 29.5/15.7); US: Empire Manufacturing, March (expect 16.0, previous 15.43); Import Prices, February (expect 0.8% MoM, previous 1.5%); Net Long-term TIC flows, January (previous $65.9bn); NAHB Housing Index, March (expect 17, previous 16); FOMC Meeting (no change expected in Fed funds, currently 0.25%).

Wednesday: IT: CPI, February f (expect 0.2% MoM and 2.1% YoY); UK: Change in Jobless Claims, February (previous 2.4K); ILO Unemployment Rate, January (previous 7.9%); EC: Eurozone CPI, February (previous   2.4%); US: MBA Mortgage Applications; Housing Starts, February (expect 575K, previous 595K); PPI, February (expect 0.6% MoM, previous 0.8%); Current Account, Q4 (expect -$109bn, previous -$127bn).

Thursday: US: CPI, February (expect 0.4% MoM, previous 0.4%); Initial Jobless Claims; Industrial Production, February (expect 0.6%, previous -0.1%); Capacity Utilisation, February (expect 76.5%, previous 76.1%); Leading Indicators, February (expect 0.9%, previous 0.1%); Philly Fed, March (expect 29.0, previous 35.9).

Friday: GER: Producer Prices, February (previous 1.2% MoM and 5.7% YoY); EC: Trade balance, January (previous -€2.3bn); IT: Industrial Orders, January (previous 5.4% MoM); CAN: CPI, February (previous 0.3% MoM).

Source: Bloomberg

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