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8 Apr 2013
Fundamental Morning Wrap: Murphey´s law hits Eurozone (again) as Korean tensions rise
FXstreet.com (Barcelona) - This mornings institutional research has seen a focus fall upon the Euro with Portuguese developments taking center stage, as courts rule against the Governments austerity programme as being unconstitutional, a move which may hinder its return to the bond markets in September. In Japan, the weak Yen has turned in a bigger-than-expected current account surplus for February driven by overseas investment, and in the geopolitical sphere, North Korea continues to be a problem.
EUR
Marc Chandler of BBH begins by noting that following the Cypriot melee, focus has shifted to Portugal and Italy. In Portugal he notes that the courts rules that the government violated the constitutional requirement for an equitable distribution of austerity and prevents the discrimination of state workers over the private sector and four of nine austerity measures were rendered unconstitutional. In Italy, he adds that the caretaker government confirmed that it will pay down half of its debt owed to small and medium sized businesses for services rendered, with payments being made within days according to reports. Danske Bank continue with the Portuguese theme, commenting that Portugal’s Prime Minister Coelho said the court’s rejection of the planned austerity measures poses a serious risk to Lisbon’s ability to comply with the adjustment programme and its effort to regain access to international bond markets by a September deadline. Jim Reid of Deutsche Bank adds that the European Commission’s statement added that continued implementation of the country’s programme is a precondition for a decision on the lengthening of the maturities of the financial assistance. He sees that Portuguese bonds have underperformed of late too.
Lee Hardman of BTMU notes that the Euro initially popped above 1.30 post NFPs, erasing its modest Cypriot led decline. Looking to the ECB he notes that the bank appears mainly concerned by and is assessing ways to help ease credit conditions for the private sectors in fiscally challenged members. He writes, “A rate cut will likely only help at the margin. Weak economic conditions outside of the US continue to help ease the negative impact of the Fed’s ongoing QE3 programme upon the US dollar.” Kit Juckes of SocGen expands on Draghi´s ECB Press meet, commenting, “I’m sure, hoping to avoid overly dangerous questions on Cyprus while at the same time keen to send a clear signal that the ECB is ready to ease monetary policy further – and possibly to cut rates – in the near future in order to help bolster the Euro Zone economy and financial system. What he actually did was to trigger a fierce Euro short-covering rally and prompt a sharp inflow of money (from Japan) into ‘soft core’ bond markets, in particular French OATs. A 28bp fall in 10yr yields in a single day is some move!”
JPY
Danske Bank analysts note that Japan recorded a bigger-than-expected current account surplus for February driven by overseas investment income boosted by a weak yen. The trade deficit remains in place though, as it takes time before the weaker yen impact exports while the effect on imports is felt immediately. Lee Hardman of BTMU notes that the yen has continued to weaken and USD/JPY’s attempt to re-establish itself back above the 100-level highlights the powerful negative impact the new aggressive monetary easing programme from the BoJ is having upon investor expectations over its ability to successfully reflate the Japanese economy. Jim Reid of Deutsche Bank adds that domestic newswires are reporting that the BoJ will begin with 1trn worth of JGB purchases next week targeting maturities of between 5 to 10 years (Nikkei). Kit Juckes of SocGen comments, “Given the size of Japan’s funding needs, its ageing population, its dwindling current account surplus and the encouragement the BOJ is giving to investors to move money overseas, it’s no wonder really, that people forecast a collapse in the JGB market every few weeks.”
Geopolitical
Khoon Goh of ANZ notes that heightened geopolitical tensions on the Korean peninsula mean that the North Korean risk premium is set to remain for a while. He feels that the risk is for further escalation near-term, with the odds of miscalculation from either side high. He writes, “Markets had been somewhat sanguine initially, but have increasingly priced in the geopolitical risk in the past couple of weeks. KRW is the worst performing Asian (ex-Japan) currency year-to-date, while the Kospi is down 3.9%. While it has largely been Korean assets that have been negatively impacted so far, the effects could start to spread to other markets in the region.” In the past he adds that Korean markets rebound strongly once geopolitical tensions ease and when the current situation will ease is anyone’s guess, but the longer it drags on, the more we can expect the North Korean risk premium to remain, and for USD/KRW to grind higher. Jim Reid of Deutsche Bank adds that elsewhere on the back of ongoing tension in the Korean peninsula, the Korean won is 0.6% weaker against the dollar, mirroring a similar loss on the KOSPI. He writes, “Over the weekend, the North Korean authorities said that they cannot guarantee the diplomatic missions in Pyongyang from April 10th onwards. With the late Kim Il-Sung’s birthday (North Korea’s founder and grandfather of the current leader) coming up on April 15th we can probably expect more rhetoric from the North Koreans over the coming week.”
EUR
Marc Chandler of BBH begins by noting that following the Cypriot melee, focus has shifted to Portugal and Italy. In Portugal he notes that the courts rules that the government violated the constitutional requirement for an equitable distribution of austerity and prevents the discrimination of state workers over the private sector and four of nine austerity measures were rendered unconstitutional. In Italy, he adds that the caretaker government confirmed that it will pay down half of its debt owed to small and medium sized businesses for services rendered, with payments being made within days according to reports. Danske Bank continue with the Portuguese theme, commenting that Portugal’s Prime Minister Coelho said the court’s rejection of the planned austerity measures poses a serious risk to Lisbon’s ability to comply with the adjustment programme and its effort to regain access to international bond markets by a September deadline. Jim Reid of Deutsche Bank adds that the European Commission’s statement added that continued implementation of the country’s programme is a precondition for a decision on the lengthening of the maturities of the financial assistance. He sees that Portuguese bonds have underperformed of late too.
Lee Hardman of BTMU notes that the Euro initially popped above 1.30 post NFPs, erasing its modest Cypriot led decline. Looking to the ECB he notes that the bank appears mainly concerned by and is assessing ways to help ease credit conditions for the private sectors in fiscally challenged members. He writes, “A rate cut will likely only help at the margin. Weak economic conditions outside of the US continue to help ease the negative impact of the Fed’s ongoing QE3 programme upon the US dollar.” Kit Juckes of SocGen expands on Draghi´s ECB Press meet, commenting, “I’m sure, hoping to avoid overly dangerous questions on Cyprus while at the same time keen to send a clear signal that the ECB is ready to ease monetary policy further – and possibly to cut rates – in the near future in order to help bolster the Euro Zone economy and financial system. What he actually did was to trigger a fierce Euro short-covering rally and prompt a sharp inflow of money (from Japan) into ‘soft core’ bond markets, in particular French OATs. A 28bp fall in 10yr yields in a single day is some move!”
JPY
Danske Bank analysts note that Japan recorded a bigger-than-expected current account surplus for February driven by overseas investment income boosted by a weak yen. The trade deficit remains in place though, as it takes time before the weaker yen impact exports while the effect on imports is felt immediately. Lee Hardman of BTMU notes that the yen has continued to weaken and USD/JPY’s attempt to re-establish itself back above the 100-level highlights the powerful negative impact the new aggressive monetary easing programme from the BoJ is having upon investor expectations over its ability to successfully reflate the Japanese economy. Jim Reid of Deutsche Bank adds that domestic newswires are reporting that the BoJ will begin with 1trn worth of JGB purchases next week targeting maturities of between 5 to 10 years (Nikkei). Kit Juckes of SocGen comments, “Given the size of Japan’s funding needs, its ageing population, its dwindling current account surplus and the encouragement the BOJ is giving to investors to move money overseas, it’s no wonder really, that people forecast a collapse in the JGB market every few weeks.”
Geopolitical
Khoon Goh of ANZ notes that heightened geopolitical tensions on the Korean peninsula mean that the North Korean risk premium is set to remain for a while. He feels that the risk is for further escalation near-term, with the odds of miscalculation from either side high. He writes, “Markets had been somewhat sanguine initially, but have increasingly priced in the geopolitical risk in the past couple of weeks. KRW is the worst performing Asian (ex-Japan) currency year-to-date, while the Kospi is down 3.9%. While it has largely been Korean assets that have been negatively impacted so far, the effects could start to spread to other markets in the region.” In the past he adds that Korean markets rebound strongly once geopolitical tensions ease and when the current situation will ease is anyone’s guess, but the longer it drags on, the more we can expect the North Korean risk premium to remain, and for USD/KRW to grind higher. Jim Reid of Deutsche Bank adds that elsewhere on the back of ongoing tension in the Korean peninsula, the Korean won is 0.6% weaker against the dollar, mirroring a similar loss on the KOSPI. He writes, “Over the weekend, the North Korean authorities said that they cannot guarantee the diplomatic missions in Pyongyang from April 10th onwards. With the late Kim Il-Sung’s birthday (North Korea’s founder and grandfather of the current leader) coming up on April 15th we can probably expect more rhetoric from the North Koreans over the coming week.”