There was a lively start to trading
as the yen gapped lower in immediate response to new of the LDP's
victory in the weekend elections in Japan. The greenback traded around
JPY84.55, the highest level since April 2011. The euro traded to about
JPY111.30, just below the year's high set in March near JPY111.45. The
Nikkei gapped higher.
However,
as the results were largely as expected. The LDP and its traditional
ally, the New Komeito secured a 2/3 majority, which will prevent the
upper house, in which the DPJ has a majority, from blocking the new
government.
In
addition, there is some speculation that the BOJ may stand pat at this
week's meeting to enhance its negotiating position with LDP-led
government. Before the weekend, the consensus was for the BOJ to expand
its asset purchase plan by JPY5-10 trillion in the face of data
pointing to the second consecutive quarterly economic contraction.
The
net effect has been a modest bout of profit-taking. The Nikkei
finished on its lows. The dollar pared its gains, falling chart support
near JPY83.60 and the euro dipping below JPY11.0, filling the opening
gaps. Market sentiment is such that new selling of the yen is likely
once the profit-taking phase is over.
In
addition to the BOJ this week, the Swedish and Norwegian central banks
meet. Sweden's Riksbank is expected to deliver a 25 bp rate cut and
issue a dovish statement that will encourage expectations of an
additional rate cut in the first part of next year. Norway is a
different story. There the central bank is expected to stand pat.
This expectation had helped spark a 1.6% rise of the Nokkie against
Stockie in the second half of last week, lifting the cross to 6-monoth
highs near SEK1.19. The euro moved above SEK8.80 briefly today before
reversing lower to almost SEK8.7430 before finding support. The euro is
finding support near NOK7.37.
The
US fiscal cliff remains a Sword of Democles over the markets. There
seems to be some movement but little progress. If the Republican
leadership is more accepting of a higher tax rate for the upper incomes,
the debate shifts to that definition. Is it $250k or $1 mln ? More
jockeying for position is likely this week, but a resolution is unlikely
until the last minute, or even afterwards.
Another
unresolved issue is Italian politics. The 2013 budget may works its
way through parliament this week with final approval possible at the end
of the week. After that is achieve, Prime Minister Monti will resign
and be the caretaker, instead of technocrat, until elections. The key
issue is whether he enters the fray and runs for premier Ironically,
Monti's roots are in the center-right, yet its is the center-left PD
that has offered more support. It was Berlusconi's center-right PDL
that withdrew support, precipitating the political crisis.
Lastly,
China announced it would move the cap on foreign sovereign wealth funds
and central bank holdings of Chinese assets of $1 bln under the QFII
program. There does not appear to be a new ceiling, but can now apply
for greater investments. This seems to immediately be applicable to
only two entities, Qatar Holdings and the HKMA. There also seemed to be
a relaxation of rules that limit the repatriation of principal and
profits, though how profits are taxed under QFII are is not clear.
