The greenback continues to hold up despite the release of the biggest deficit in over six decades. The 2009 budget highlights a deficit of 12.3% of GDP and includes spending for the financial sector and a $630bn reserve fund to reform the US healthcare system. However, the market took these huge numbers in stride and the reaction in Usd and Treasury suggests there are no real worries over the ability for the US to fund these spending obligations. In addition recent Treasury auction of 5y and yesterday’s 7y note auctions have been well received with foreign investors still having a strong appetite for Treasuries. The UK banking system came under focus once again, as another large UK bank accepted government-sponsored capital injection. This obviously sparked renewed chatter over nationalization. In the agreement, the bank will place £320bln of assets with the UK governments asset protection scheme. In the Euro Zone, January’s unemployment rose by 256,000, pushing the unemployment rate up from an upwardly-revised 8.1% to 8.2%. the highest since September 2006. This, combined with a benign CPI inflation reading, supports the view that the ECB will need to cut rates further than the market expects. In Japan, the industrial production registered a record decline printing at 10% m/m decline in January and annualized figure printed at -30.8%. CPI figures managed to avoid negative territory, as Core inflation fell by 0.2% and Tokyo CPI was up 0.6%. The single bright spot was the unemployment rate, that surprisingly fell to 4.1% from 4.4% previously with, probably great relief to the Japanese government. Those analysts that are looking at technical indicators or relying on Japan’s current-account surplus and sturdy net foreign-asset position to discern a market direction are missing the fundamental shift drivers. A new market focus is clearly moving the Yen, which will equate to further weakness. First is the Yen correlation to the risk aversion trade which has been decoupling over the past month. Second is the rapid deterioration of underlying domestic fundamentals. Highlighted by yesterday’s collapse of industrial production this solidifies our expectation of Q1 GDP to print roughly a 10.1% annualized decline. That said, perhaps the most critical factor is the mass exodus of foreigners from Japanese equity markets. Foreign investors are now a significant part of the Japanese market – their departure would exacerbate the lack of domestic interest. We have not seen Japanese individuals stepping up and buying shares and the BoJ announcing its intention to buy up to ¥1trn (pale in comparison to total capitalization) in shares from banks in a ditch effort to stabilize the sector failed improve market sentiment. It seems though that the land of the rising sun is finding it hard to do just that, rise. While the U.S is well ahead of the curve in terms of multiple stimulus packages, the world’s second economy is in a deadlock. No, the incessant rambling, incapability of government officials to hold their rank for more than a few months will result in foreign investors fleeing a country that has not seen the worst of the global financial fallout. Let’s not forget the Nippon economy is largely export based, the locals are in no hurry to regain 89.00, Next Stop 100.
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