Choppy Market: Push Me Pull You

There have been several developments and they have imparted conflicting impulses into the market.  The S&P downgrade of a number of large banks based on a new methodology that has been unfolding over the past couple of years comes at a poor time, when many banks, especially in Europe, are having funding problems and different measures of financial stress are elevated.  Today's development of the German 1 year note yield falling below zero for the first time is reflective of those pressures. 

The EFSF announcement is hardly satisfying, but it is indicative of policy makers still seeking ways to keep the system together.  China cut is reserve requirements by 50 bp and this helped stabilize the daily risk appetite. 

After the PBOC cut reserves requirements last week for small rural banks, many observers have been looking for broader near-term easing, but were probably caught off guard.  The Shanghai Composite was off -3.3%, the worst in the region, but we note that  the Asian markets open late turned higher after the PBOC's move.

Although I am still euro bearish and expect a move below $1.30 by year end,  there way be better selling levels shortly.  The market may be reluctant to extend short positions, which already seem large (look at IMM) when there is still an opportunity that European officials take more action.   The $1.3350-$1.3400 area offers the resistance now.  A caveat:  in recent days, the North American market has sold into the euro, sterling and foreign currency gains in general that were recorded in Europe. 

Sarkozy is to present the French proposals for next week's EU Summit tomorrow.  Merkel will do the same on Friday.  Also US economic data over the next few days may also encourage risk-taking.  Ironically, or counter-intuitively, strong US economic data may see dollar sales for the so-called risk assets. 

In terms of data, German figures today were better than expected.  Retail sales rose 0.7% in Oct compared with a 0.1% consensus forecast and unemployment fell 20k, pushing the rate to 6.9%  from 7.0%.  The market had been looking for generally flat numbers.   In contrast, French household consumption was weaker than expected, flat vs 0.2% consensus.  In Switzerland the KOF survey hit a two year low of 0.35 from 0.75 in Oct. 

Lastly, note that official MOF data from Japan shows intervention between Oct 28 and Nov 28 was JPY9.09 trillion (~$115 bln).  Money market indications on Oct 31 had led many observers to conclude that the intervention operation on Oct 31 was JPY7.7 trillion.  There had been rumors of covert intervention earlier this month.  Some will see the difference (9.09-7.70 = 1.39) as evidence of it.  It is possible, but it could be that intervention on Oct 31 was larger than the initial money market (current account balances at the BOJ) suggested.