Markets were still on the defensive at the start of the Asian session as the swine flu crisis develops. Risk aversion was at heightened levels but there were signs of bottom-picking in currency markets with some viewing the risk sell-off as overdone and looking for bargains. Hence vulnerable currencies like the AUD, NZD and EUR failed to break new ground to the downside and succumbed to range-trading for most of the session.
There were further developments in US automaker Chrysler’s survival plans ahead of the April 30 deadline as a WSJ article published details of the deal agreed with the UAW. The largest auto union would own a 55% stake in the restructured carmaker, Italy’s Fiat a 35% stake while the US govt and Chrysler’s secured lenders would together own 10%. The deal still needs ratification by Chrysler workers before the deadline but this is seen as a formality. The news is helping Asian bourses into positive territory and pulling US stock futures off early lows.
However, this proved short-lived as a lunchtime article from the WSJ highlighted that the Fed had told BOA and Citigroup that they may need to raise capital based on early results of the stress tests. Capital shortfalls are reported to be huge at BOA but both banks are objecting to the preliminary findings and are planning to respond with detailed rebuttals, according to the article. The prospect of raising additional capital in the current environment is seen as difficult, to say the least, and we saw a knee-jerk sell-off on Asian bourses and a jump in the USD on risk aversion.
Elsewhere, with eyes focused on swine flu, the data releases in Asia had little impact and were mostly overlooked. Nevertheless, Japan retail sales showed a decline for the seventh consecutive month in March, down 1.1% from the previous month on a seasonally-adjusted basis, slightly worse than expected, whereas on an annual basis the numbers made better reading. Although they were down 3.9% y/y, it was better than the -4.9% expected and a better result than the peak of -5.8% seen in February. While the headline numbers continue to be deflated by lower prices, it is noted that a pull-back in consumer spending is also intensifying as unemployment rises amidst the deepening economic downturn. The outlook for consumer spending is decidedly grim, with no near-term meaningful pick-up expected as incomes decline.
The CHF is likely to attract the spotlight today as SNB Chairman Roth speaking in Zurich just as EURCHF hits its lowest level since the SNB intervened to sell CHF on March 12, currently sitting between the 55- and 100-day moving averages. With the SNB unlikely to back away from its earlier commitment to prevent CHF appreciation as long as deflation is a risk, we expect to hear more verbal intervention from Roth but physical intervention may be left until we reach lower levels seen when the last round was initiated. The knee-jerk reaction to such “words” was an immediate weakening of the CHF, but the fall soon peters out. Note there were more CHF negative comments from Swiss finance minister Mertz o/n who said he expects a sharp fall in the economy in 2009, but noted that Swiss banks had ample liquidity.
Later, US data releases concern April Consumer Confidence. The March confidence number was an off-the-charts shocker at 26.0 - compared to a reading of 42 in late 1974, when the US was dealing with a failed president, a lost Vietnam War and the first oil shock in its history. While we may expect a small rebound in confidence as equity averages have come well off their March lows, the sour mood is extraordinary and has to improve sharply for any chance of a broader stabilization in the outlook for US growth.
Prior to that, S&P/CaseShiller Home Prices for February will be released. There is a lot of talk of the "second derivative" in economic weakness showing signs of improvement, that is the rate of worsening is slowing, even if things continue to get worse. This is hardly cause for ebullience, though it is still very important to watch the second derivative and the good old-fashioned absolute price levels to improve to slow the hemorrhaging of public and financial sector balance sheets. Also, the focus has shifted a bit more to commercial real estate now, for which we don't have a handy index to follow on a monthly basis just yet.