Market wrap


Global market sentiment: Markets were calmer last night. There appeared to be no residual impact from the Italian election stalemate, the Eurostoxx 50 index rebounding by 1.6%. An EC Euro one economic confidence survey improved, and US data for durable goods (ex-aircraft) and housing beat expectations, helping the S&P500 to a 1.0% gain so far. Bernanke’s second day of testimony to the Senate was less confrontational than expected, perhaps also helping sentiment. Commodities were less enthused, though, Brent oil down 0.4%, copper down 0.5%, and gold down 1.1%.


Interest rates: US 10yr treasury yields consolidated after a four day decline, ranging between 1.84% and 1.89%. A 7yr auction was a tepid affair. with a bid-cover ratio of 2.9 (vs 2.9 average). Euro one peripherals also stabilised in the wake of the inconclusive Italian election, 10yr government bond yields in Italy down 9bp and in Spain down 13bp. Italy managed to auction EUR6.5bn of 5yr and 10yr bonds. Australian 3yr bond yields initially dipped from 2.72% to 2.68% but rebounded to 2.73%.


Currencies: The US dollar index (DXY) is slightly lower. EUR rose from 1.3050 to 1.3130. USD/JPY bounced off 91.14 to 91.94. Underperformer AUD slipped a little further, from 1.0230 to 1.0184 (a five-month low) before stabilising. N D stabilised around recent lows, ranging between 0.8226 and 0.8266. AUD/N D ranged between 1.2365 and 1.2400.



Economic wrap


US durable goods orders fell 5.2% in Jan, mainly due to sharply lower Boeing orders (civilian aircraft fell 34%). Defence orders were down 70% having soared 107% in Jan, and auto orders were about flat for the second month running. The bright spot in the report was the 6.3% jump in core capital goods orders, which have risen about 12% since the start of the fourth quarter. However this strength is taking time to show up in shipments of core durables which fell 1.0% in Jan and were flat in Dec.


US pending home sales rose 4.5% in Jan and the Dec fall was revised from –4.3% to –1.9%. Sales are up 10.4% yr.


Euro one economic confidence rose from 89.5 to 91.1 in Feb, its highest in nine months. But in the aftermath of the Greek election mess in May last year this index fell from 93.7 to 88.7 in 3 months and something similar should be in prospect in the next few months, given the timely reminder from the Italians that fiscal austerity is deeply unpopular across much of Europe. Also, the business climate index rose from –1.09 to –0.73, its fifth month without slippage. And the GfK reported a slight rise from 5.8 to 5.9 in their “March” consumer confidence report for Germany.


Euro one money supply M3 annual growth edged up from 3.4% yr to 3.5% yr in Jan, but credit to the private sector decelerated from –0.7% yr to –0.9% yr.


UK GDP growth revised up from 0.0% to 0.2% in 2012, although the Q4 contraction of 0.3% was unrevised. Exports and capital expenditure were behind the quarterly decline, despite private and government spending growth. A separate measure of business investment spending was down 1.2% in Q4, after a downward revised 0.5% Q3 gain, so a grimmer picture on the capex side of the UK economy late last year is emerging.


Italy update: There is speculation a bi arre Bersani-Berlusconi alliance might emerge (bi arre given their polar positions on austerity) in an effort by those two to avoid a second election to keep the comedian Beppe Grillo from winning an even more embarrassing % of the popular vote than the 25% he achieved at the weekend. Meanwhile the caretaker government under PM Monti will probably proceed with the bailout of Monte Paschi bank that was agreed in Dec, despite Grillo protests.



Outlook


Event risk today: N data today (building permits, monthly business confidence) is second tier but could cause minor N D movement. Australia’s CAPEX activity (and expectations) will be more important.


N D/USD 1 day: 0.8300 should provide resistance today, the downside looking vulnerable near term.


N D/USD 1-3 month: The positive trend since May has been broken and we now targets around 0.8100 during the month ahead. Our view of a fresh high later in 2013 remains intact though.


N 2yr swap yield 1 day: Opening today down unchanged at 2.92%.


N 2yr swap yield 1-3 month: Following this correction, which should extend to the 2.80%- 2.90% area, a rise above 3.20% should ensue.


AUD/USD 1 day: 1.0260 should provide resistance for any bounces today, the downside still more vulnerable.


AUD/USD 1-3 month: Remains inside an 18-month consolidation triangle, which should see it reach 1.0150 before an eventual break above 1.0600.