Asian markets were relatively stable, surprising considering the wild ride FX took us on only a day before. For us, Wall Street's dismal performance yesterday should be considered a shot over the bow, however most pundits are still viewing the equities pullback as corrective and short term. In our mind, equities are being artificially inflated by loose monetary policy and quantitative easing more than solid fundamentals, which makes them highly reactive to shifts in investor risk sentiment. We would suspect further selling today as events in the Middle East / North Africa continue to weigh on risk appetite. Oil prices are leading the move higher with WTI Crude rapidly nearing the critical technical and psychological level of $100 per barrel as protests in Libya turned violent and news hit the wires that ports would halt exports. Precious metals continue to shine with gold surging above $1400 and silver climbing briefly above $34.00. In FX, CHF is still the safe haven trade of choice trading down to 1.2800 and below 0.9400 against the EUR and USD respectively. Despite the easing of risk pressure today, we would be cautious moving into any risk correlated trades just yet regardless of how cheap they seem. With Iranian naval ships in the Mediterranean, planned protests in Saudi Arabia and Libya about to erupt into all-out civil war, event risk is very high. Singapore announced January inflation numbers, showing headline CPI surged to 5.5% y/y vs. 4.6% y/y in Dec, though core CPI eased to 2% y/y from 2.1%; a clear signal that regional inflation pressure is ramping up. In New Zealand, Moody's stated that there would be no immediate impact from the quake on the country's Aaa rating, which caused the NZD to jump higher. However the supportive statement was then followed by the ominous remark that the country was at risk of moving back into recession which has weighed on the currency. RBNZ Bollard once again reiterated his commitment to issue cash to banks on any day required during this emergency situation. Markets are now pricing in a small chance of a rate cut by mid-year, but Bollard included no remarks regarding monetary policy, which cut back speculation of a pre March 10th meeting cut. In a surprise result (although we had expected a shift towards inflation fighting) the BoE MPC minutes (Feb 10th) showed a 3-5-1 vote to keep rates and the asset purchase target unchanged. Dale & Weale both voted for a 25bp hike while ultra-hawk Sentance has now called for an aggressive 50bp hike. Remarkably, Posen continues to vote for an increase in the asset purchase target of £50bn. The minutes showed that most members agreed that mid-term inflation risk had increased but wanted to see that Q4 weakness was merely temporary and not a signal of further economic moderation. The knee jerk reaction was sterling buying to 1.6270 which quickly found sellers. It seems our hawkish view that the BoE members would begin migrating towards the inflation side was correct and the MPC is now leaning toward hiking sooner to keep inflation expectations subdued. With the rates market already pricing in a 25bp hike by June this result will clearly move that date up to May, and provide the sterling with near term support. That said, the core driver of FX today will be developments in the Middle East / North Africa. So while interest rate expectations should provide the cable with adequate demand, should events escalate, head for safe haven currencies.
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