Global equity markets have followed the U.S. sharply lower. The Nikkei shed 3.1%, while major European bourses are 1.25%-2.25% lower near midday in London. The decline in share prices has helped buoy fixed-income instruments, but supply concerns and some inflation jitters are limiting the upside. The dollar is weaker and is threatening support against the yen. The euro is in the middle of its 2.5-cent range against the greenback, but is poised to move higher today.
A poor reception to Japan's auction of 1.4 trillion yen in 10-year bonds weighed on the government bond market. The yield on the benchmark bond rose 6 basis points to 1.755%. At 1.8% the coupon was lower than those sold over the last two months. With a deluge of supply in the pipeline, many market participants seem to prefer the intermediate sector. According to one report, thus far in 1999, the total return on a Japanese 10-year bond has been 2%, while the return on a six-year bond has been closer to 2.9%. The
Bank of Japan
holds a policy meeting tomorrow. Although some pundits continue to discuss a quantitative target for reserves in the banking system or money supply, it seems premature to expect such a move this side of the fiscal year-end.
Both Moody's and S&P downgraded the credit rating of Japan's largest brokerage, Nomura, to stand a couple of notches above junk status.
At issue are the losses suffered from operations abroad and the slow reorganization efforts at home. Japanese oil refineries also appear particularly vulnerable. Many have weak balance sheets and are unlikely to be in a position to pass on higher energy costs to customers.
While several top Japanese officials continue to sound optimistic that the economy has stopped contracting after five consecutive quarters of shrinkage, foreign investors have gone gaga. According to data from the
Tokyo Stock Exchange
, foreigners bought a record 776 billion yen worth of Japanese equities in the second week of March, compared with a weekly average of 300 billion yen over the previous five weeks. Domestic institutional investors appear only too happy to find such willing buyers.
BOJ Hayami's off-the-cuff remark that he had nothing to say about the foreign exchange market was understood by some participants as a sign that the BOJ was unlikely to intervene, even if the yen strengthened more against the dollar. The market continues to flirt with the support for the dollar near 117 yen. A break of this level could see a quick move toward the 116.50-yen level. One of the factors that may be helping the yen today is the unwinding of yen carry trades, especially against the Greek drachma (unwinding short yen/long drachma positions). The drachma is being undermined by Greek's proximity to Serbia and Kosovo, where a NATO strike is planned. The Greek drachma is at two-month lows against the euro. Greek stocks are being hit hard for the second consecutive session. The spread between Greek bonds and German bunds has widened sharply from the record low of 181 basis points set at the start of the week to now stand near 200 basis points.
The weakness of the drachma and Greek assets in general will dampen ideas that the central bank could deliver a rate cut in the near term.
Even if the ECB and Greece are not prepared to deliver a rate cut soon, others are. A decision in today's Swedish central bank meeting could lead to a cut in its repo rate tomorrow. Denmark and Norway also appear to be close to reducing rates. The Bank of England is likely to cut rates as well when it meets in early April.
Although some Canadian bond yields have begun dipping below comparable U.S. rates, a BOC rate cut probably needs a somewhat stronger Canadian dollar. For the record, the July fed funds futures contract implies the market perceives about a 1 in 3 chance of a Fed hike in the second quarter and about a 1 in 2 chance of a hike in the third quarter.
The continued fall in European equities is helping bonds snap a three-day losing streak. The yield on the benchmark 10-year German bund is 2-3 basis points lower. Equities are suffering deep and broad losses. One of the chief features, according to press reports, has been the reiteration of a profit warning by the third largest mobile manufacturer. Mergers in the telecommunications sector are helping some issues fare better than others.
The OECD revised its eurozone growth forecast down to 2% from 2.5%, according to reports and warned that inflation could fall further from the 1%-2% range seen recently.
It also forecasts that the European Central Bank will cut its 3% repo rate in the first half. The ECB's Issing also acknowledged that growth risks for the eurozone are still on the downside. Nevertheless, price data from Germany is being reported on the high side of expectations. As more states report their March cost-of-living data, higher household energy and telecommunication prices are becoming apparent. Also Germany reported that import prices rose in February for the first time since August 1990. The 0.1% increase compares with expectations for a small decline. On a year-over-year basis import prices are off 5.6%. Export prices rose 0.2%, reversing in full the January decline. On a year-over-year basis, export prices are down 1.5%.
Outside of some knee-jerk reaction, perhaps as a result of an outmoded way of thinking about the geopolitics, there seems little reason to expect the dollar to rally when NATO strikes Serbia. The unwinding of yen carry plays will weigh on the dollar. The Swiss franc may also draw regional safe haven flows. Given that the market is short the euro, in the current environment, where many players appetite for risk has waned, to move to the sidelines requires buying the euro.
Note that the euro has not managed to post a higher weekly close against the dollar since its inception. Last week was a gallant effort: Close but no cigar. It settled last week just below the $1.09 level. A move now above the $1.0960 area would set the stage for another run at the top of its recent range, which comes in near $1.1050.
Marc Chandler is an independent global markets strategist who writes daily for TheStreet.com. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at