- Risk appetite improved yesterday on the back of strong US housing data and optimism that the fiscal cliff can be avoided.
- Moody's downgrades France from triple A rating.
- Bank of Japan took a breather at the November monetary policy meeting.
- Focus today on the Eurogroup meeting about Greece, US housing data and Fed chairman Ben Bernanke.
Risk appetite improved yesterday driven by improving housing data and increased expectations that the fiscal cliff will be avoided. The NAHB market index, one of the leading indicators on US housing market activity, increased to 46 – the highest level since May 2006. The improvement in the US housing market is gaining pace. This is also evident in the housing starts data and building permits, which have recovered recently, and despite an expected minor setback in today’s release, we expect the recovery in the US housing market to continue into 2013.
US equities rallied offsetting last week’s decreases. The S&P500 ended the trade up by 2.0%. Asian stock markets are trading with no clear direction this morning. Nikkei is down 0.1%, while Hang Seng is up 0.8%. In the FX markets EUR weakened against USD following the French downgrade The cross is trading around 1.28 this morning. Continued worries about the intensified conflict between Israel and Hamas have sent oil prices to the highest level in a month.
Moody’s downgrades the French sovereign rating from triple A to Aa1 and keeps the country on negative outlook. France has been on negative outlook by Moody’s since February. The rating move brings Moody’s on par with S&P, while Fitch still has a triple A rating on France. Moody’s writes that "France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand’ and ‘structural rigidities" in the longer term, see Moody’s statement.
Bank of Japan (BoJ) took a breather at the November meeting and kept its asset purchase programme unchanged, after expansions in both September and October. This was in line with consensus expectations. However, with Japan in recession, political pressure for more easing is intensifying and the BoJ board is poised to be more dovish next year. BoJ remains on an aggressive easing path and we expect the target for its asset purchase programme to be raised by JPY10-15trn as soon as its next meeting in December.
Besides BoJ expanding its asset purchase programme next year, we also expect the maturity of BoJ's bond purchases to be increased and the inflation target to be raised from 1% to 2% at some stage next year, see also Flash Comment: BoJ takes a breather but is poised to ease further, 19 November.
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