Key News
*Geithner Refrains From Labeling China a Manipulator (Bloomberg)
* China’s Economy Grows 6.1%; Slowest Pace in Almost a Decade
(Bloomberg)
* Industrial production plunge weighs down single currency (MarketWatch)
*JP Morgan beat profit estimates on record revenue (Bloomberg)
*Euro falls on bets ECB division to undermine economic recovery (Bloomberg)
The Morning Run-Down
China reported slower growth overnight. At 6.1% its economy its growing half as fast as it was two years ago and the report was shy of the 6.2% forecast. The Australian dollar and New Zealand dollar traded lower on the news, which implied continued weak demand for commodities and weak growth out of the region. Also weighing on the Kiwi is a report from the OECD recommending further rate cuts and projecting recession to last through 2009, with growth at just ½% in 2010.
The Eurozone industrial production showed the biggest drop since 1986. And with inflation running well below its 2% tolerance level the ECB should be acting more aggressively to further add monetary stimulus, yet the ECB is examining ideas of a 1% floor in short term rates and hesitating on “non-standard” measures.
Nevertheless, market activity today has been mixed and currencies have been choppy with a positive earnings report out of JP Morgan and a better than expected Philly Fed number taking back some early gains in the dollar. Global stocks are broadly positive and currency market volatility is softer across the board this morning.
The below chart describes well the relationship between an uptick in risk appetite and the impact on the market forecasts of volatility (implied volatility). As risk appetite improves implied volatility contracts as traders begin to pull out the extreme risk premiums they required six months ago to compensate for the extent of uncertainty.
Aud/Usd 3-month implied volatility. The white line represents the 61.8% retracement of the spike in volatility started last July—a key support level. Could it be a predictor of another surge in the “fear trade?”
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