Sentiments Weighed Down by China Trade Data, Dollar Mildly Higher

Sentiments in Asian markets was weighed down by the trade data from China released over the weekend, which some analysts described as poor. China reported a trade deficit of $31.5b in February, much worse than market expectation and was the largest deficit since 1989. Some people might people to Lunar New Year holiday as the cause of disruption in trade. However, note that the combining deficit of January and February was at $4.25b which was enormous comparing to the coming figure of $0.89b in the first two months of 2011. Also, looking at January's and February's figures together, overall exports rose 6.9% and import grew 7.7%. But note that exports to EU, the largest trading partner of China, dropped -1.1% yoy even though exports to US maintained double digit growth at 14.9% yoy.

The overall figures suggest that the Eurozone debt crisis is having a hit on China's export. And China could now be facing larger risks in growth than in inflation. Premier Wen lowered the growth target to 7.5% this year, the first sub-8% target since 2005. And there are talks that while China used to overshoot the targets in recent years, it may undershoot the target in one or two quarters this time. Overall expectation for further easing is built up but that would be far less than the post Lehmann Brothers packages. Also, China will mainly focus on using the reserve ratio and refrain from cutting interest rates for fear of reignite a property bubble.

Regarding Greece, EU finance ministers agreed that Greece had met the conditions for the EUR 130b second bailout. EUR 35.5b was freed up in payments and interest for bond holders. Decision for the rest of the bailout fund will be made today in Brussels. IMF Managing Director Lagarde will recommend EUR 28b in contribution to Greece bailout. That includes EUR 9.7b remained from the first bailout approved back in 2010. Late last week, the International Swaps and Derivative Association said that Greece's bond swap constitutes a "credit event" for the use of the CAC that breached the rights of bond holders. An auction would be held on March 19 to determine how much of the CDS contracts would be paid. According to data from the Depository Trust & Clearing Corporation, the net volume of CDS on Greece stands at around $3.2b. Rating agency Fitch lowered Greece's rating to "restricted default" over the debt swap deal. Moody's also consider Greece defaulted as the bond exchange "represents a 'distressed exchange" and is therefore a debt default.

Meanwhile, markets are already starting speculations on who will be the next to have Greek style "managed defaults". Portugal is believed to be the front-runner. Based on IMF figures, it's estimated that Portugal will need a primary budget surplus of 2% of GDP to keep debt burden stable. However, after writing down 40% of its debt, the primary budget surplus target would be 1% of GDP only which is much more manageable. Though, beyond Portugal, it's believed that Ireland, Spain and Italy should be safe for the moment.

In a report, the Swiss based Bank for international Settlements said that Fed's Operation Twist program "may have a significant impact on the 10- year Treasury bond yield, comparable to that of outright asset purchases." The program is expected to lower 10 year yield by about 0.85% , comparing to the 1.64% reduction by the $2.3T quantitative easing program. Part of the impact of the OT program was offset by Treasury's increase in debt maturity to average 62.8 months. BIS estimated that increasing the holdings maturity by one month drives 10 year yield down by around 3.4 bps.

Ahead of BoJ meeting, Japan's Prime Minister Noda reiterated that despite recent depreciation, "yen is valued highly in relative terms when considering fundamentals". Finance Minster Azumi declined to comment on yen's value but pledged again to "take firm action against excessive and speculative moves". BoJ expanded the QE program in February by JPY 10T to 65T and named an explicit inflation target of 1%. No change is expected this week.