Weekly Review

CURRENCY: A rollercoaster ride for the NZD with Friday’s Asian session happy to hunt down short positions. The European and North American sessions were, however, happy to resume the downside pressure.
GLOBAL MARKETS: Friday night NZ time saw consolidation in markets as they realised they may have gotten a little carried away over the week. US 10 year Treasury yields dropped 9 basis points to 3.32 percent, on top of a 10 basis point fall the day before, while the S&P500 rose 0.1 percent. Oil prices rose, ending the week up around a quarter of a percent.
KEY THEMES AND VIEWS EUROZONE MUDDLING ON One would have thought it would have surprised few observers, but markets nonetheless weren’t happy on Friday night NZ time when Moody’s downgraded Irish debt by a whopping five levels from Aa2 to Baa1, with a negative outlook. US and European equities fell in response. Ireland’s 10 year bond yields rose 17 basis points to 8.60 percent, and credit default swaps on their sovereign debt climbed to their highest level since November 30. Meanwhile, putting the next couple of years in the “too hard” basket for now, EU leaders on Friday agreed to create a permanent debt-crisis mechanism in 2013. Germany pressed for assistance as a “last resort” only, but the final text read “if indispensible”. On the same day, Germany ruled out increasing the 750 billion euro emergency fund. The main question now is whether there is a better way of utilising the fund than last-minute rescues. Bond purchases or shorter-term credits would be obvious contenders, but anything other than an overtly necessary lifeline for the greater good is going to be politically unpopular, particularly in Germany. However, the EU needs to buy itself some time to come up with a plan on how to deal with the debt crisis more proactively. Since banks have been urged to hold ever more “safe” sovereign debt in recent years, defaults could have grave consequences for financial stability in the region. Events so far do not inspire great hope of coordinated, successful action.
A MEASURE OF SUCCESS? US 10 year Treasury yields may be up 70 basis points since Ben Bernanke announced the second round of quantitative easing in late August, but US equities have risen 17 percent (and oil futures too).