Markets Range Bound Last Week But Consolidations May Not Last Long

Financial markets were basically engaged in consolidation last week as the boost from ECB's OMT and Fed's QE3 faded. Much volatility was seen in the Japanese yen though as BoJ followed and expanded its stimulus program. Sterling was the relatively stronger one as it attempted to break through 1.63 key resistance level against dollar but failed.

In stocks, Dow and FTSE traded in tight range below prior week's high even though DAX managed to break through on Friday. The CRB commodity index, however, retreated sharply after from prior week's high of 321.36 to close at 308.98 but that provided not much support to the greenback. After all, some more consolidations would likely be seen this week but that shouldn't last long. We'd anticipate euro's rally to resume soon together with risk markets.

In US, while many Fed official spoke last week, one important point to know was Minneapolis Fed Kocherlakota, a known hawk, changed stance. Kocherlakota said that Fed "should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5%" and he urged Fed to continue the open-ended MBS purchase until employment "improve substantially."

Boston Fed Rosengren also quantified that the natural unemployment rate from his position was at the lower end of 5-6%. So, an important point to notice ahead is whether this 5.5% magic number could be confirmed as a consensus among Fed policy makers.

In Europe, Spain easily EUR 0.86b in 10 year bonds last week with yield dropped to 5.666%, sharply down from 6.647% in last auction in August. Bid-to-cover ratio for the 10 year bonds also rose to 2.8 times, up from 2.4 times back in August. Spanish 10-year yield closed the week at 5.76%, well below 6% level but there have been speculations that the country is going to seek a sovereign bailout soon.

It's reported that there were discussions among EU officials on plan to trigger ECB's OMT bond purchases. Markets are expecting Spain to announce a plan that focuses on structural reports on September 27, i.e., this Thursday and it will be a major focus.

The BOJ accelerated the pace of monetary easing by doubling the size of asset purchases, in addition to leaving the uncollateralized overnight call rate at around 0 to 0.1%. Slowdown in global economic growth and recent tensions between China and Japan over territorial dispute are expected to delay Japan's recovery as exports growth would be affected.

According to the central bank, the move is expected to "help ensure that Japan's economy resumes a sustainable growth path with price stability." The move came in earlier than market expectations, sending Japanese yen lower, and Nikkei stock index and cash bonds higher.

Yen's post BoJ soldoff was rather brief and staged a broad based strong rebound. It seemed that markets are not too satisfied with BoJ's QE announcement after a second thought. BoJ raised the asset purchases by JPY 10T, that is around $127b. But that was relatively unaggressive comparing to Fed's open-ended, unlimited purchase of MBS purchase of $40b per month. Also, Fed's QE is seen as unsterilized and should have a larger effect on depreciating dollar. Also, ECB's OMT was also seen as "unlimited" in nature even though that would be sterilized.

The September BOE minutes unveiled that the MPC members voted unanimously to leave the Bank rate unchanged at 0.5% and the asset purchase program at 375B pound. While policymakers noted that inflation had been coming down more slowly than anticipated, the central bank should not be refrained from expanding the size of asset purchases as the pace of economic recovery remained subdued. We retain the view that the BOE would increase the quantity of program by another 50B pound in as soon as next month.

The RBA released the minutes for the September meeting. While the central bank left the cash rate unchanged at 3.5%, the minutes showed that policymakers are willing to lower interest rates if the economic condition deteriorates further. According to the minutes, "the current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth."

Meanwhile, strength in AUD has also affected economic growth. As indicated in the minutes, "members discussed the possibility that the high level of the exchange rate was weighing more heavily on the economy than might be expected."