Dubai Concerns Continue To Weigh On Risk Appetite

Market Brief

The slump in equities continues today as further details of Dubai World’s debt burden come to the fore; dragging risk sentiment lower across asset classes. Asian indices are down 3-5% across the board and US equity futures point to an equally unsavoury open after yesterday’s public holiday. The USD rebound has caused gold to collapse to $1140 levels, oil below major support at $75, and EURUSD back toward 1.4850 levels; a mere 50 pips away from the 1.4800 support that defined the lower end of its range in the prior two weeks. Increasingly, the break out in risk assets against the USD on Tuesday feels like it was an exercise in triggering stop losses around major technical levels more than a bona fide break out on genuine demand. The longevity of the previous ranges meant the market was well aware of the key supports and likely build-up of stop loss orders, and it seems that the uninspiring data calendar coupled with light liquidity has meant traders had very little alternative sources of volatility.

The one exception to the pattern is USDJPY which has dropped to fresh 14-year lows overnight at 84.83; igniting another flurry of rhetoric from Japanese policy makers in a bid to temper JPY strength. Finance Minister Fujii today indicated that he may contact US and European authorities about the possibility of coordinated currency intervention if it was deemed that JPY strength posed a threat to Japan’s recovery. His remarks had the desired effect by pushing USDJPY back above 86.00 levels; but the trend remains resolutely downwards and it is unlikely his words will be sufficient to permanently ward off USDJPY bears.

Of the limited data we did get yesterday; Eurozone M3 figures disappointed. Predictably, credit conditions remain tight as the broader measure of money showed growth of just 0.3% against consensus estimates for a rise of 0.8%. Loans to private non-financial companies declined to at a rate of 1.2% whhile in contrast, loans to households improved from -0.3% to -0.1%. German CPI for November came in weaker than expected at 0.3% YoY ( 0.5% expected) but the reading was still an improvement from the month prior.

For today, it seems that risk aversion is going to reign supreme over other data releases until a satisfactory conclusion is reached about the Dubai issue; however events coming up include Swedish GDP and Retail Sales, Eurozone Consumer Confidence and Swiss KOF Leading Indicator.