- Risk sentiment improves on strong US data
- Investors turn attention away from Cyprus and equity markets rise
- Fitch puts Cyprus on negative watch
Risk sentiment improved and investors shifted attention from Cyprus after another round of strong U.S. data. Durable goods orders came out higher than expected, and while core orders were a bit softer, numbers still indicate strong capex spending in Q1 and Q2. Moreover, the S&P/Case-Shiller index of property values in 20 cities showed that house prices in January rose at their fastest annual rate since June 2006, indicating the U.S. housing market strengthened at the beginning of the year. On the negative side, U.S. consumer confidence was weaker than expected. The index fell to 59.7 (consensus 67.5) from 68.0 last month, as consumers became increasingly pessimistic about short-term economic prospects. While some near-term slowdown in consumption could be seen after the tax rise and increase in gasoline prices, there are still overall fundamentals for consumers strengthening: house prices rising, employment improvements, wage growth rebound and last but not least, higher equity markets.
Last night, Fitch put Cyprus’s rating on negative watch, saying ‘that the shock resulting from the systemic failure of Cyprus’s banking system will have profound negative implications for the domestic economy, which heightens the risk to public finances.’
The U.S. equity market gained support from positive U.S. data releases. Both S&P500 and the Dow Jones Industrial Index ended the day 0.8% higher. This morning in Asia, all regional equity markets are also trading in positive territory. Hang Seng is up by 0.7%, while gains in Japanese equities are limited due to dividends. Topix and Nikkei are both up by 0.1%, but would have increased more without shares going ex-dividend.
Yields on 10-year US Treasuries declined 1bp to 1.91%. A USD35bn auction of two-year notes generated few surprises with a bid-to-cover above 3, and yield on two-year notes closed more or less unchanged.
In the FX markets the Cyprus bailout deal and its implications continue to weigh on the euro. The EUR/USD pair remained relatively stable yesterday, but the cross has traded slightly lower again this morning, and is currently trading below 1.2850. The USD/JPY continued its up-trend overnight. The cross is again back above 94.75. Investors increased their bets that the BoJ will scale up policy measures in connection with the monetary policy meeting next week.
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