SCOREBOARD: Failure to launch

Japan's QE announcement failed to lift markets, but stronger German sentiment and US earnings reports gave some support.

Well there was some expectation that the Bank of Japan’s QE program may give the markets a boost but no such luck. The program confirmed a 2 per cent inflation target and said it’ll print off ¥13 trillion in order to get the ball rolling. The Nikkei responded by weakening and the yen actually strengthened as the bank’s decision to print came in below expectations. It's not printing enough apparently! Although that view kind of overlooks the fact that their printing program to date has failed.

So umm, you know, what’s printing more going to achieve? But this is the road we’re on. People look at something that hasn’t worked, despite huge quantities of money being printed, say ‘whoopsy’ and argue that doing more of it will do the trick. Anyway it was the same story over in Europe where markets all closed weaker (the Dax down 0.7 per cent, CaC off 0.6 per cent, while the FTSE100 was flat (-0.03 per cent).

The weakness in Europe stands in contrast to the data and news that we got overnight though. There were some very positive developments. For a start, the German ZEW survey (survey of financial market professionals) shows economic sentiment soaring – the index shot up to 31.5 in January, almost three times the expectation and following a reading of 7 in December. The index now stands at its highest level since May 2010. The current situation index rose to 7.1 from 5.7 (average is -23). Clearly optimism is rising and rightly so. Remember that this result follows recent commentary from the Bundesbank, which sounded a more positive tone as well. Markets weren’t totally devoid of action on this front, but it was more in the forex space where the euro had a whippy session, bouncing around a big figure from 6-10 AEDT but ending little changed all up (1.3315).

Over in the US, markets overcame initial weakness and are a little higher as I write with the Dow up 45 points (13,694), the S&P500 0.3 per cent higher (1490) and the Nasdaq flat, up 0.04 per cent (3136). What seemed to lift stocks in the end was a batch of better-than expected earnings reports, from companies like Freeport-McMoRan and Du Pont, and the realisation that despite a fall of 1 per cent in December, existing home sales are bouncing back. Data out last night showed a monthly fall but this follows a strong gain the month prior. Indeed sales are up around 13 per cent higher for the year, and for 2012 as a whole, existing home sales are 9.2 per cent higher than 2011, and at a five-year high.

Commodities look to be sharing in this joy – BoJ printing more, more optimistic Germans, US housing market rebounding etc. So crude is up 0.6 per cent ($96.65), copper also 0.6 per cent while gold is up only smalls ($6 to $1693). Otherwise on the rates space there was little action. US Treasuries pushed modestly higher and yields are down a basis points or two. The 10-year stands at 1.83 per cent, the 5-year is at 0.76 per cent and the 2-year is at 0.25 per cent.

Bits and pieces otherwise – the European Commission’s Economics Commissioner said that he would be in favour of Ireland and Portugal applying to the ECB’s bond buying program as a step toward a full return to financial markets. Both countries said they would ask for extensions on loans received from the bailout funds, and both are planning to tap the market soon. As for the data – even the notoriously pessimistic Brits had an improvement in confidence, with the Confederation of British Industry’s measure of business optimism rising to 0 from -10 in January. As for the US, other data wasn’t so flash and the Richmond Fed manufacturing index dropped to -12 in January from 5 in December.

Looking at the day ahead, the Australian dollar might be up around 50 pips from yesterday morning, most of those gains made after the BoJ decision, but from 1630 AEDT there was little action and the unit sits at 1.0565. The main event for Australia of course, will be those CPI numbers (1130 AEDT). The consensus is that headline CPI will rise 0.4 per cent, while the cores are expected to be up about 0.7 per cent. Tonight we see the BoE’s minutes, UK employment stats while there isn’t much for the US.

Hope you have a great day…

Adam Carr is a leading market economist.

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