We anticipated a re-escalation of tensions to be felt in the capital markets, and there have indeed been some signs of this, but at the same time, the resilience of the euro and European equities is notable. We continue to expect that the tensions over Crimea are likely to increase as next weekend's referendum draws near.
After last week's consolidation, the Chinese yuan weakened today following a series of poor data, including the unexpected trade deficit and fall in exports, and evidence of a sharp drop in lending. New yuan loans rose CNY644.5 bln in February, half the pace seen in January (CNY1.32 trillion). Aggregate financing as a while rose CNY938.7 bln, which is about 2/3 of what the consensus expected and CNY2.58 trillion previously. The gap between the two is a rough and ready proxy for shadow banking.
Since the financing data, like the trade data, may be distorted by the lunar new year, it makes sense of medium-term investors and policy makers to wait for some confirmation. On a preliminary basis, it does look like efforts to rein in the less regulated sector may be have turned the corner.
The Shanghai Composite slumped almost 2.9%, to double the year-to-date losses. The poor data, which is consistent with the slowing of the economy, coupled with last week's first modern on-shore bond default, weighed on sentiment.
Japan's news was disappointing. The current account deficit was larger than expected, and Q4 GDP was revised down. The January current account deficit ballooned to JPY1.59 trillion from JPY639 bln in December, driven by the more than doubling of the trade deficit to JPY2.35 trillion. This is a large seasonal factor that is likely exaggerating the deteriorating trend. February and March seasonal factors are considerably better. And news that the Japanese government will press ahead with trying to re-started a few nuclear plants may also be helpful in a few months in reducing energy imports.
At the same time, Q4 growth estimate was pared from 0.3% to 0.2% on the quarter and 0.7% from 1.0% on an annualized basis. The main source of the revision was capital expenditures, which rose 0.8%, not 1.3% as it was originally estimated. The weakness of capex and limited wage growth remain key weaknesses of Abenomics. In addition, it is not clear that the QQE (Quantitative and Qualitative Easing) is sufficient on the inflation front. Although the BOJ does not target it, the fact that the GDP deflator was -0.3% (from -0.4%) remains disappointing.
The dollar did gap lower against the yen in early Asian trading and reached a low just ahead of JPY102.60. However, the greenback march up to JPY103.30 before the Japanese data. A marginal new high was recorded in early European activity, but the momentum faded as the morning progressed. Given our expectation of renewed tension, we are more inclined to see the dollar peak near current levels (~JPY103.30).
The main economic data from the euro area this week are the industrial production figures. Germany reported a 0.8% rise last week. The regional report will be made at midweek. The risk is to the downside of the 0.5% consensus estimate. Today, France reported industrial output fell 0.2% instead of increase by 0.3%. Adding insult to injury, which in this context means highlighting the gap between France and Germany, the December series was revised to show a 0.6% decline, twice the pace initially reported. In fairness, the manufacturing component of French industrial output actually rose by a robust 0.7% in January.
Separately, Spain also disappointed. On a workday adjusted basis, output rose 1.1% in January. It was half the pace seen in December and compares with a consensus forecast of 1.8%. The silver lining here was that capital and durable goods output was strong (3.3% and 1.6% month-over-month respectively). The recovery continues to appear on track.
Italy offered a pleasant upside surprise. January industrial output rose 1.0%, twice the expectation and offsetting in full the revised 0.8% decline in December (initially -0.9%). On a year-over-year basis, output rose 1.4%, the highest since August 2011.
The euro's resilience was not sufficient to bring it back above the $1.39 level. Support is pegged near $1.3850. While Draghi stayed away from directly commenting on the euro, he did suggest that it impacts growth and inflation. Since obviously, it is desired that growth and inflation pick up, this was the statesman-esque way to indicate his preference for a weaker euro. French Central Bank governor Noyer was less subtle.
In reference to the euro, Noyer told Bloomberg TV: "We are clearly not very happy at the moment." He also echoed Draghi's argument that inflation has been pushed down by temporary factors. Like Draghi, Noyer also spoke enthusiastically about growing the ABS market.
Sterling and the dollar-bloc are behaving more in line with our expectations. Sterling traded at a 4-day low, reaching almost $1.6650. Last week's low was set on Tuesday near $1.6640. The 20-day moving average is near $1.6670 and sterling is trading below it for the first time since February 13. Bounces may not be constrained by the $1.6700-20 area.
Elsewhere, near $0.9040, the Australian dollar is well off the pre-weekend high near $0.9140. Look for the $0.960 area to now offer resistance and the Canadian dollar extending its pre-weekend losses. The US dollar has moved above the CAD1.11. Initial potential in North America extends toward CAD1.1150-60. The New Zealand dollar is holding up better ahead of the RBNZ meeting later this week which is widely expected to result in a rate hike.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.