The negative sentiment derived from the Italian election seems to be drifting into the back of traders’ minds, despite some of the commentary from Beppe Grillo that he had no interest in working with Pier Bersani. Certainly the eight basis-point move to the downside in the Italian ten-year bond was the green light for European traders to pick up yield, with decent improvement in the demand from the previous ten and five-year auctions the key catalyst. Spanish bonds caught a ride and fell thirteen basis points on the day as well.
The bond market remains pivotal here and if the investment community is happy buying, then equities and risk FX will catch a bid. 5% continues to be the line in the sand for the ten-year, and despite all the political unknowns it seems the fixed income community feels that given the massive level of Italy’s public debt, there will not be a major change in fiscal policy anytime soon. We feel any moves above 5% could present themselves as a buying opportunity over the longer-term.
Ben Bernanke continued with his re-positioning exercise, although we thought some of his comments about revisiting the exit plan the bank originally outlined in 2011 ‘sometime soon’ were of interest. It also seems the board is putting a lot of thought into extending the holding period for its purchases, which we take as dovish at the margin. Mix in some strong data over the last couple of days in the shape of new and pending home sales, durable goods (ex-transportation), Richmond Fed manufacturing and consumer confidence, and you can see why the equity market has found buyers and the Citigroup economic surprise index (which measures the actual data print relative to consensus) has moved back into positive territory after being as low as negative 30 in late January.
Still, US markets continue to push higher and are clearly eyeing the recent high of 1530, where a break should act as a magnet for traders to test 1576. S&P futures are pretty much unchanged as things stand, suggesting the gains seen in Asia are more reactionary in nature.
While there has been drama in both Europe and the US, Asia has its own share of key focal points as well today. As mentioned yesterday, we hold a bullish bias on the ASX 200 and we will keep an eye on the uptrend and 21-day moving average on the downside, and while the index printed a high of 5112 (the highest level since September 2008), it failed to close above the recent high of 5106.6. In some ways today’s Australia’s Q4 CAPEX numbers held a win-win scenario for the market, where on one hand a weak print could solidify the market’s view on a March rate cut, thus re-enforcing the yield trade, while on the other a strong print on future capital intentions could install confidence about the business landscape.
Given the importance the market had placed on the Q4 CAPEX numbers, it was interesting to see price action in AUD/USD after the print. The numbers themselves will still divide economists on what it means for rates, although it has to be said that while the headline print for the December quarter was weaker than expected, the investment intention for the coming financial year at $152,494 million was above expectations, although still represented an 8.1% fall from the first estimate for this financial year. The RBA will be weighing up whether the non-mining sector is picking up the slack here, which, looking at these statistics, is debatable. Still, with AUD/USD pushing to 1.0286 and the OIS market now pricing in an 18% probability, it suggests on the whole this was a positive survey, and we would echo this and feel there will be a few economists altering their March calls. There has even been discussion that the RBA will alter its view on when the peak in investment actually takes place, and certainly this survey suggests it may occur later than mid-2013. With this in mind we feel taking profits (as modest as they are) on our short idea makes sense given the backdrop and the pairs inability to break the 1.0149-1.06 range.
Japan has been on fire today as well and traders continue to buy USD/JPY around the base-line (the yellow line) of the daily Ichimoku cloud, currently at 91.60. There has been solid buying here in the last few days and we would stay long until we see a daily close below this support level; in which case a deeper correction to the top of the cloud at 88.24 could materialise (see chart below). The big news today has been that the Cabinet officially presented its nominees for the BoJ governor and deputy governor positions, and the much-speculated names ended up coming to fruition. The candidates will now need to be approved in the Lower and Upper House and the voting should take place around March 15, with many expecting the leadership to take fold five days later.
So it looks as though we are going to see another solid open for the European markets, and while traders will be keeping an eye on narrative from Congress, it seems the bulls have found renewed optimism. Of course this can be unwound quickly, but data is light on the ground today with US Q4 GDP (revision) perhaps the highlight. The market is expecting to see an improvement from -0.1% to 0.5%, although most see this as quite backward data. We have already seen UK consumer confidence which came in-line as expected at -26, while we await German unemployment prints and retail sales. Eurozone CPI is also due.