Improved risk sentiment sees equity and commodity markets move sharply higher

By Mike Burrrowes

NZD

Mounting hopes that EU leaders will announce further plans to stem the debt crisis saw risk sentiment rebound overnight. As usual, this saw NZD/USD surged higher, rising almost 1 cent to 0.7550 currently. The details of any European plans remain light, so expect trading to remain volatile.

Despite the ongoing ructions offshore, the NBNZ business survey strengthened a bit. While foreign forces were fully expected to prune the survey further, net confidence edged back up, to +18.3, from +13.2. The all-important own-activity outlook rose to +28.8, from +26.1. Overall, the latest survey justifies our view that GDP growth is robust and will likely stay that way for at least the near term. Granted, pricing intentions were relatively tame, at +17.8. However, the more general inflation-expectations variable remained on the high side, at 3.10% - very much like the RBNZ survey measure of last week. While this does not mean the RBNZ should hike its OCR forthwith, it does suggest the Bank needs to be very careful about easing any further.

The NZD/AUD struggled overnight as there was talk of strong M&A flows supporting the AUD (see Majors section). The cross briefly broke through the 0.7600 level, but has since recovered to around 0.7620.

Looking to the day ahead, we have the National Employment Indicator for September due for release. This will help us judge jobs momentum. Initial support on NZD/USD is eyed at 0.7500 and resistance at 0.7630.

Majors

Risk appetite has surged higher overnight as hopes mounted EU leaders will announce further policy actions at their meeting on 9-10 December. In this backdrop, “safe haven” demand for the USD and JPY has waned. The NZD and AUD were the best performing currencies over the past 24 hours.

The recovery in risk appetite was broad based across asset classes. The S&P500 index and Euro Stoxx 50 index surged 3.0% and 5.2% respectively. The financials sector of the Euro Stoxx 50 index bolted 7.2% higher. Our risk appetite index (scale 0 – 100 %) has recovered from 27.7% to 29.0%. Commodity prices jumped onboard for the ride higher, with WTI oil and silver rising 1.5% and 2.9% respectively.

The surge in risk appetite was driven by developments in Europe. EUR/USD rallied from 1.3300 to an intra-day high just below 1.3400. Early this morning the currency has fallen back to 1.3320. Comments from several European officials have created speculation that Germany and France will push for more rapid fiscal integration at the meeting of EU leaders tonight and 9-10 December.    

Further bolstering sentiment was rumours the IMF would make €600b available to Italy. While the story has been refuted by the IMF, it highlights policy makers are open to taking further actions to stem the crisis. Despite the recovery in sentiment overnight, many investors still remain sceptical a clear and credible solution will emerge in the coming week. Indeed, €19bn of bond issuance from Italy, Spain and France through the week could serve to remind investors of the problems facing Europe.

The improved investor sentiment saw “safe haven” demand for the USD index wane, falling 0.6% to 79.20. The JPY was the weakest performing currency, with USD/JPY rising from around 77.70 to 78.00.
The AUD was the best performing currency against the USD over the past 24 hours, rising from below 0.9700 to 0.9900 currently. The move higher was exacerbated by Friday’s confirmation SAB Miller have approval to purchase Fosters for AUD 11.5b. The deal is still awaiting shareholder approval (meeting 1st Dec).

The GBP struggled to make gains against the USD, currently trading just above 1.5500. Comments from several Bank of England policy makers weighed on the GBP. The BoE’s Fisher and Weale both noted that the Bank can undertake more QE if needed. The BoE Governor King, testifying to the Treasury Select Committee, blamed the European debt crisis for the UK’s woes.

While not gaining much attention, the OECD lowered its growth forecasts overnight. The Eurozone is expected to grow by 0.2% in 2012, from 2.0%. It has lowered the UK forecast to 0.5% for 2012 and has called for a recession with two quarters of negative growth in Q4 2011 and Q1 2012. We'll soon know if they're right.

Looking to the night ahead, expect the market to focus on the proposed EU plan to fast track fiscal consolidation within the Eurozone. Data wise, we have Eurozone consumer confidence and the several Fed members due to speak. 

Mike Burrowes is part of the BNZ research team. 

All its research is available here.