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Weekly Money Market Review with IBQ: All eyes are on China and the emerging markets

January 29, 2014

After a slow start of the year, this week provided all the excitement investors and speculators were missing coming into 2014. Thursday was a surprising day with a major improvement in the UK unemployment rate while on the other side of the continent; the Bank of Canada was making headlines with more dovish than expected statement accompanied with some verbal intervention that weighted on the Loonie. Thursday went on to surprise with weaker than expected US PMI figures. However, unlike in other recent risk aversion episodes, tapering concerns did not seem to be the issue causing the weakness of the US Dollar. The main reason for the higher performance of the low yielding European currencies and the Yen, was the news out of Asia . Indeed, China's HSBC PMI coming below 50 at 49.6 disappointed the market who already had dire appetite for Asian risk taking as of late. Emerging markets continue to suffer in the beginning of 2014 all the way from China dealing with its own shadow-banking debt, to Turkey with the Turkish Central Bank intervening in the foreign currency market to support the Lira. The intervention of $3bn in an attempt to shore up its exchange rate which has been under continued pressure ever since the Central Bank refrained from raising benchmark Interest rates on Jan 21st. All of these factors combined, pushed investors away from Emerging markets and into the "safer" GBP, EUR, CHF and JPY. The euro closed the week near the high at 1.3678, while the Pound closed at 1.6482 Extended unemployment insurance benefits dropped for 1.32 million individuals on December 28, 2013 . According to analysts, if these benefits are not reactivated, the unemployment rate is likely to fall significantly further in January, even beyond what the underlying economic fundamentals imply. If however, Congress retroactively extends benefits another three months, which members are currently contemplating, then the sharp drop in the unemployment rate is likely to be delayed until April. The sharp drop is separate from any downward pressure emanating from improving labour market conditions. Over the past week, the Canadian economy weakness appears to be increasingly on investors' mind. Given that the gradual dovish shift by the Bank of Canada at the last two meetings was motivated by concerns over low inflation, with household debt and house prices at record levels and mortgage rates creeping up, Canada has been having difficulties attracting new foreign investments. This week, the decision of the bank of Canada to keep interest rates steady at one percent while reiterating that it expects inflation to remain lower than previously anticipated was expected by market participants. However while a negative in some ways, a lower Canadian Dollar will help give a boost to Canadian exports enough to help expand the economy without the bank having the cut rates even lower than they already are. This news out of Europe continue to impress with the eurozone composite Purchasing Managers Index rounding off a broadly positive set of services and manufacturing readings. France beat expectations but still clearly acts a drag on the overall eurozone recovery, while Germany outperformed. The eurozone composite came at 53.2 beating expectations of 52.5, while the composite PMI reading implied a Q1 GDP growth of 0.3 percent. In addition, the eurozone current account numbers came above consensus at 27bn, setting a new record surplus, thanks to a pickup in goods exports. Spain's success in issuing a 10bn bond was the highlight of the week, in what was the largest single bond sale that Spain has ever made, sending many eurozone periphery bonds markets into multi-year lows. Demand was said to be around 40bn and it allowed Spain to cover around 20 percent of its funding plans for 2014. The overall dynamic looks good for Spanish government debt as the IMF also bumped up its estimate of Spanish growth by three times, from 0.2 percent to 0.6 percent. In an unexpected move, the Swiss National Bank proposed an increase to the amount Swiss Banks were required to hold as a buffer against their positions that are backed by residential property in Switzerland from 1 percent to 2 percent. The SNB have taken measures to slow the rise in housing prices for a while now and despite these attempts, prices have steadily increased to an inflation adjusted level that is just 5 percent lower than the 1989 peak, or bubble, that preceded a burst which seriously maimed the economy. Bank of England Mark Carney suggested in an interview that the Bank will come up with a new approach next month for signalling when it would be ready to raise interest rates. Additionally, Carney dropped a heavy hint that the MPC would drop its threshold guidance framework based upon the unemployment rate reaching 7 percent. We expect the unemployment rate to drop to the 7 percent level in the data to be published next month, a week after the February Inflation Report. The HSBC China Manufacturing PMI fell to a six-month low of 49.6 in January, weaker than expected and down from 50.5 in December. While China's Q4 GDP data released early this week surprised to the upside, this latest data suggests a softer start for the New Year. Moreover, it may raise some concerns of a repeat of 2013, when growth faltered in the first half of the year before stabilizing in the second half of the year. Bank of Japan Governor , Haruhiko Kuroda , dismissed the need for an additional monetary easing measure, as according to him, prices in the nation are headed towards the central bank's inflation target. He also added that 'the current policy would continue' should risks to the BoJ's price forecast materialise The Peninsula

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Source: Peninsula, The (Qatar)

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