Monday's Blues

The US dollar is broadly higher against the major and emerging market currencies to start what promises to be an important week, with several parliaments due to vote on Greek 2.0, the second and possibly final LTRO, and PMI readings. Eurogroup head Juncker’s admission that a third package for Greece cannot be ruled out may also be taking a toll on sentiment. The main exception to the generalization is the Japanese yen, which has seen initial losses reverse amid talk of Japanese exporter offers.

Global equities are mostly lower, though the Shanghai Composite bucked the move to close at new 3-month highs, building on last week’s 3.5% gain, amid expectations of further easing of monetary policies. The MSCI Asia-Pacific Index fell 0.8% and the Dow Jones Stoxx 600 is off about 1% near midday in London, with technology, health care and financials leader the way lower. Telecoms is the only sector ahead today.

Italian and German bill auctions were well received, while the Belgian supply was absorbed without much fanfare. The decline in equities has encouraged a bid tone in most bond markets. Of note, Euribor has eased for the 48th consecutive session and for the first time is slipping below the ECB’s 1% benchmark floor for the since January 2011.

There are five key developments.

First, Australia’s Prime Minister Gillard successfully withstood a leadership by former Prime Minister Rudd, but the Australian dollar has not benefited. Instead, the Australian dollar has seen follow through selling after the pre-weekend reversal. Unwinding of yen crosses and fears that the Gillard may call for elections appears to be weighing on sentiment. While support is seen near $1.0650, it may take a break of the $1.0570-$1.06 support to signify something of greater significance.

Second, euro zone money supply improved in January (0.7%) and lifted the year-over-year rate to 2.5% from 1.5%. Yet the credit growth to the private sector rose a minor 0.4% to 0.7%. The gap between the rise in base money (ECB’s balance sheet) and broad money (M3) is still worrisome.

Third the G20 meeting pushed the IMF funding issue off to April. The pressure is on Germany to agree to a stronger firewall, which in essence means combining the remaining uncommitted guarantees of the EFSF (~250 bln euros) with the ESM (500 bln euros). This is seen as necessary to boost the IMF coffers. Yet, contrary to the press reports that simply add the projected funds the IMF will likely raise to the euro zone funds, as if all the IMF funds can be used to support Europe, there is already a push back against over-exposure of the IMF.

Fourth, the German parliament is due to vote on Greek 2.0 today, even though the IMF’s role has yet to be determined, which means EU’s tab (and Germany’s) is also not fully known. Nevertheless, with the help of the opposition Social Democrats and Greens, the measure will pass, even though polls suggest a majority of Germans are opposed.

Fifth, oil prices are lower today after hitting 9-month highs before the weekend. Brent is off almost $1 and WTI is off half as much. The profit-taking appears to have been spurred by concerns of weaker growth and concerns that pressure is mounting to tap strategic reserves as was coordinated last year to address the supply shock emanating at the time from Libya
Monday's Blues Monday's Blues Reviewed by Marc Chandler on February 27, 2012 Rating: 5
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