The equity markets consolidated after a week where the S&P 500 index dropped almost 4%. Equities where hampered by a weaker than expected NAHB housing index and a slightly weaker than expected NY Empire State Manufacturing index. The S&P 500 increased by less than 1 point to end the trading session at 1079.The Euro Bond markets have stumbled over the past week, which has lead to a decline in the value of the Euro currency. Besides Greece (+54 basis points), Ireland 10-year bonds have been the second worst performer in the periphery this past week (+31 basis points) as markets focus on the ongoing costs of recapitalizing the Irish banking sector. Last week, the Irish government got permission from the European Commission to pump another EUR24.5 bln into nationalized Anglo Irish Bank, about 10% more than the EUR22 bln that Fin Min Lenihan had signaled earlier. Ireland has been the poster child for successful austerity measures, but markets are getting jitters about the sheer size of its problems. If Ireland cannot pull through by doing all the right things, how can markets get bullish about Greece, Portugal, and Spain? This is one reason why markets have turned negative on the periphery again. Greek 10-year spreads to Germany are making new post-EFSF highs around 833 basis points today. Greek yields are up 23 basis points in absolute terms today, but other spread widening in the periphery is coming from Germany outperforming (10-year yields down 6 basis points on the day).
The euro bounce ran out of steam around 1.2870, and given the renewed pressures on the periphery, but euro gains are going to be limited near-term. Levels to look out for on the downside are 1.26 (50% retracement level of the euro’s June-August rally). There is also a band of minor support around 1.2730-40 (lows from July and August). Meanwhile, the yen and Swiss franc remain bid on the renewed market jitters. Dollar/yen is again flirting with the 85 level despite disappointing Q2 GDP data. EUR/CHF is trading at levels not seen since early July, and break of the 1.34 level today points to a test of the July 1 low of 1.3074. Minor support seen around 1.3275, which is also today’s low so far. Markets for now seem to be downplaying risks of intervention by either BOK or SNB and are clearly testing the resolve of those central banks with recent price movements.
Japan’s currency snapped a two-day losing streak against the dollar after a report showed the nation’s gross domestic product expanded at a slower-than-expected pace. The weakness in the economy is translating into a stronger currency, further punishing Japan. Second quarter GDP grew at .1% quarter over quarter compared to the .6% that was expected by economists and the 1.2% gain in the prior quarter. The continued deterioration of the Yen is inspiring cries for intervention in the currency markets. Lawmakers from Japan’s ruling party last week urged Prime Minister Naoto Kan to consider intervening in the currency market for the first time since 2004. They also called on the Bank of Japan to “engage in large-scale monetary easing.” Kan and Bank of Japan Governor Masaaki Shirakawa may meet this week to discuss measures to address the yen’s strength, the Asahi newspaper reported on Aug. 13. Kan said he’s “concerned” about the yen’s recent appreciation, Kyodo News reported on Aug. 14. “The Japanese government appears to have begun to prepare for intervention, but the situation is probably not yet ready for actual intervention,” Tomoko Fujii, senior director and currency strategist at Bank of America Merrill Lynch in Tokyo, wrote in a note to clients today. “The Ministry of Finance would probably begin intervention in the low 80s.”