Greece is the time, is the place, is the motion

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Highlights

  • The US dollar is again being broadly supported by heightened concern that Greece’s debt/deficit issues are soon to reach a climax.  The pressure on Greece is clearly spilling over to the other Mediterranean countries.  The yen too has generally benefited from these same development, despite an unexpected and large drop in manufacturing orders (-5.4% vs. +3.7% consensus).  Sterling slipped in line with the euro even though the 1% rise in February industrial production was twice what was expected as was the March Halifax house price index (+1.1% vs. consensus 0.5%).   Emerging market currencies are also generally lower.  As expected the BOE left policy unchanged.  The ECB is not expected to alter policy either, but the focus is on the new collateral framework and the sliding haircuts, for which Trichet promised more details. 
  • After the erosion of US share prices yesterday, Asian equities were on the defensive from the get-go.  There were also country specific factors for some of the MSCI Asia-Pacific 0.6% decline.  The disappointing orders data form Japan took the Nikkei 1.1% lower.  A state of emergency in Bangkok due to social unrest saw the local market drop 2.6%, the biggest loss in five months.  Indonesia’s central bank warned that the equity market may be in a bubble and threatened capital controls, pushing equities prices down 1.5%   European equities are mostly 1.3%-1.8% lower.  Financials and basic material sectors are leading the broad sell-off.  US shares are trading lower in Europe. 
  • Greek bonds continue to sell-off and there is clearly heightened contagion today.  For the record Greek’s 10-year yield of about 7.48% today is about 439 bp on top of Germany.  Portugal’s 10-year yield is 10 bp higher and the premium over Germany is the widest since early Feb.  Spanish, Irish, and Italian bonds are under somewhat less pressure, but are generally under-performing.  The flight to safety has seen 2-year German bunds yields slip to a record low.  The US Treasury sells 30-year bonds today.  The auctions this week have generally been well received and sufficiently so as to negate some of the concerns that arose in late March due to the more tepid reception. 

Currency Markets                                               

Greece is the time, is the place, is the motion.  It remains the key force in the capital markets.  There is increasing concern that Greece needs to resort to the unspecified facility agreed to by the EU and IMF in late March. While Greek officials try to reassure the market that Apr. funding needs have already been met, the loss of confidence among investors means that the issue is coming to a head soon.  The news stream is not good.  Moody’s cut the outlook for two Greek banks today to negative from stable, and this is on top of the downgrades of five commercial banks last week.  This comes on the heels of yesterday’s report that Greek banks want to tap into support package put together in 2008 by the previous government.  There have been anecdotal reports of household and commercial depositors withdrawing funds from Greek banks.  The government reported today households and businesses withdrew €8.5 bln of deposits in Jan.-Feb. period, which is roughly 3% of the total deposits.  The strategic ambiguity of the interest rate and conditions that will be attached to access to EU/IMF funds continues to raise the prospects of a Greek default.  As has been well discussed, more than 2/3 of Greek bonds are in non-resident hands and largely held by other European banks.  The risk of financial and economic contagion is real and is being recognized by investors.

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Australia and the UK reported better than expected data, but not sufficiently so to offset the risk-aversion that is lifting the dollar and yen.  Australia created 30k full time jobs, while losing 10.6k part time jobs in Mar.  The Feb. data was revised lower, but the unemployment rate remained steady at 5.3%.  UK industrial output rose 1.1%, led by a 1.3% rise in manufacturing.  The strength seemed to be largely a function of a payback from the mostly weather induced decline in Jan and not a sign of a sharp acceleration of the UK economy.  The UK’s Feb. figures offer a stark contrast with Germany data.  Germany’s Feb. industrial output was expected to rise 1%, but instead came in unchanged, and adding insult to injury, the Jan. increase was cut to 0.1% from 0.6%.    Separately, the euro-zone reported a 0.6% drop in Feb. retail sales, the consensus had expected a flat reading.  More recent and forward looking survey data suggests the euro zone and the German economy in particular likely saw better growth as the quarter came to a close.  Nevertheless, fiscal consolidation being introduced by several countries in the euro zone, including Germany, would point to the downside risk of aggregate demand.  While Europe should consider itself fortunate if the region’s economy were to expand above 1% this year, US growth is expected to be around 3%. 

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Japanese economic news was also disappointing, but the yen’s penchant for appreciating during periods of heightened risk remains intact.  Japanese machinery orders fell a sharp 5.4% in Feb.  The consensus missed this widely, having expected an increase that would have offset the 3.7% decline in Jan.  On a year-over-year basis, orders were off 7.1%, compared with expectations for a 2.1% increase.  This report is understood as a leading indicator for capital investment and that coupled with exports were the two main supports for the economy.  The risk is that today’s report points to a larger problem of over-capacity in Japan. 

The New York Times reports that China could adjust its currency in the coming days.  The market does suspect something is afoot.  Note that within days of postponing the Treasury’s assessment of currency market manipulation, Geithner, who was visiting India, was invited to Beijing.  The 12-month NDFS are edging higher and are now near 3%.  If China does not want to give the appearance of capitulating to US pressure, it seems that expectations for an imminent announcement may be misplaced.   In any event, if and when China moves,  we expect a small move that would be largely inconsequential for trade and capital flows and, given the US-Japanese experience, is likely to prove insufficient for some in the US (and Europe).

Upcoming Economic Releases                                                               
The US reports weekly jobless claims and chain store sales.  The latter will be important to harden expectations for next week’s retail sales report.  Note that retail sales have been somewhat stronger than one would suspect given the continued weakness in consumer credit, which fell $11.5 bln in Feb. the US reported late yesterday.   At least five Fed officials give public speeches today. 

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Marc Chandler is the global head of Brown Brother Harriman’s Currency Strategy Team. For more of BBH’s currency views, visit the BBH FX website here.

This material has been prepared by Brown Brothers Harriman & Co. (“BBH”) and is intended for information purposes only.  This communication should not be relied upon as financial, investment, tax or legal advice.  This communication should not be construed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency.  This information may not be suitable for all investors depending on their financial sophistication and investment objectives.  The services of an appropriate professional should be sought in connection with such matters.  The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed. Sources used are available upon request. Any opinions expressed are subject to change without notice. Please contact your BBH representative for additional information. BBH’s partners and employees may own currencies in the subject of this communication and/or may make purchases or sales while this communication is in circulation.

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