With very little economic or political news today, the markets consolidated and settled almost unchanged across the board. The S&P 500 Index closed down 1 point to 1108, after being up as much as 3 points and down as much as 4 points on the day. The equity markets where helped out today by the banking sector which was offset by the oil sector which weighed on the indexes today.
The currency markets have political and economic issues to absorb. Japan’s deflation forces will come to the forefront this week. While the yen has traded more on international forces and perceived risk appetite than on domestic factors over the past couple of years, the persistent deflationary environment could become more of a market mover as the world economy recovers. Deflation forces will be apparent this week, with Jan nationwide CPI (expected at -1.4% y/y vs -1.7%), core CPI (expected at -1.2% y/y from -1.2%) and Feb Tokyo CPI (expected at -2% y/y from -2.1%) all likely to show a negative reading. This could prove to be a negative for the Yen.
In political news, the Dutch government collapsed over the weekend as the Labor Party withdrew from the government as it refused to agree to the NATO request to extend Dutch troops stay in Afghanistan. The spread between Dutch and German 2-year and 10-year bonds was flat Monday, suggesting no real market impact. On Tues, the Dutch government is expected to bring to market 2 bln Euros of 2012 and 2016 paper and it seems this will be unimpaired by political developments. It is the fifth Dutch government to falter since 2002. The Queen is expected to decide over the next few days whether to call for a new election, which must be held within 83 days of the Queen’s decision. Opinion polls suggest that the anti-immigration right may be picking up support. Dutch bond have been unable to keep pace with German bunds, which have received a safe haven bid. Year-to-date, the Dutch 10-year yield has risen 1 bp. The German 10-year bund yield has declined 9 bp. At the 2-year sector, the Dutch yield has fallen 5 bp compared with a 25 bp decline in Germany. Given the market’s focus on the Mediterranean part of Europe, the Dutch news has been largely taken in stride. The issue with the Netherlands is not economic. The 5-year CDS at 57.60 is just above France’s 56.50. With GDP around $850 bln, the Netherlands is the fifth largest in the euro zone behind Germany, France, Italy, and Spain.