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News & Views: Tuesday, October 7

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What you need to know for today's trading day.

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This article contains three of Jeff Cooper's posts on the Buzz & Banter, where subscribers can follow over 30 professional traders as they share their ideas in real time.

Russia Spends $1.68 Billion Reserves in 2 Days to Buoy Ruble (Bloomberg)

U.S., UK regulators want quick Deutsche Bank Libor settlement (Reuters)

Global Banks Face 25% Loss-Absorbency Rule in FSB Plan (Bloomberg)

German industrial output dives 4% in August (BBC)

Bank of Japan Sees Wider Dissent on Inflation Language (Bloomberg)

Views
The Hong Kong protests continued to die down overnight, and the market has been similarly reflecting that. The Hong Kong dollar has recovered 80% of its losses from three weeks ago when the protests really started to boil over. Similarly, the Hang Seng index (HSI) has recovered about 65% of its losses. From a bearish perspective, this is a positive sign because the market continues to be weak in spite of geopolitical calming.

German industrial production fell by 4.0% in the month of August, the largest single month drop since 2009. The expected decline was -1.5%. European equity and credit indices are showing the largest negative risk-adjusted return across all assets this morning, some of which is in sympathy to the post-European close weakness in US equity markets yesterday. Norway's OBX is the worst performing equity asset of the bunch, although there is no significant news events to attribute to this weakness other than a number of analyst downgrades for the rest of the year's profit and cash flow estimates. Perhaps there is some fallout from the Norges Bank 5% holding of GT Advanced Tech (GTAT) that is now kaput?

The night was owned by the central banks, however. The first meeting was from the Bank of Japan (BoJ), who kept policy unchanged. There is a growing consensus from the market that the central bank will need to ease conditions further to counterbalance the economic effects of various sales tax hikes, not to mention the continued inefficacy of the comprehensive easing plans. There has been pushback on that idea from the official level, although one BoJ member (Shirai) dissented at the meeting, arguing that the BoJ should have downgraded its inflation expectations forecast to "in a long-term uptrend" but an increasing number of indicators have recently been more or less flat. Additionally, Governor Kuroda did not put the kibosh on the Yen weakness that we have been seeing from other policymakers saying that the changes in FX rates is natural and reflective of differing policies.

The Reserve Bank of Australia's (RBA) meeting was an important one last night because many in the market expected it to go down the path that its neighbor, the Reserve Bank of New Zealand (RBNZ) has already embarked. That is actively intervening in its FX market to weaken its currency rather than having to adjust its interest rate policies. The RBA's statement was a near carbon copy of the prior month, and the market reacted accordingly. The AUDNZD FX pair is showing the largest positive risk-adjusted gain across all assets on the aforementioned idea that the RBA would need to do more than jawboning to keep its currency from rallying further. It repeated that the exchange rate remains high by historical standards and that a period of interest rate stability is likely.

The Russian central bank has been using up its currency reserves again in September to help stabilize the ruble. In the month, the CBRF sold $9.6bln in currency to buy the ruble. Additionally, over the last two days, it has used another $1.7bln. While the central bank plans to hold FX auctions in the coming weeks, the various USDRUB basis swaps have now reached -300bps, or the equivalent of charging 3% to help facilitate a cross-currency transaction. That reflects how Western companies and financers have been barred from any activity in Russia, and why situations are so dire in the country.

Data:
- German industrial production MoM (Aug) down -4.0% vs -1.5% expected, prior revised down to 1.6%
- Japan leading index (Aug prelim) down to 104.0 vs 104.0 exp, prior 105.4
- Swiss CPI YoY (Sep) down to -0.1% vs 0.0% exp, prior 0.1%
- UK industrial productino MoM (Aug) flat vs 0.0% exp, prior 0.4%


Twitter: @MichaelSedacca

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No positions in stocks mentioned.

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