The weekend’s G-20 summit passed with little lasting impact, Japan’s economy formally entered recession as GDP shrank in the third quarter, and Australian Retail Sales grew less than economists expected. The economic calendar is fairly thin for the upcoming European session, with September’s Euro Zone Trade Balance report the only notable item on the docket.
Key Overnight Developments • G20 Summit Fails to Excite the Markets • Japanese Economy in Recession As GDP Shrinks in the Third Quarter • Australian Retail Sales Grow Less Than Expected Critical Levels The Euro gapped down to open the trading week below the 1.26 level, sinking as low as 1.2510 before correcting to range around 1.2550. Sterling followed a similar dynamic, gapping down to hit a low of 1.4639 before re-establishing a foothold above the 1.47 mark. Asia Session Highlights A bland communiqué following the weekend’s G-20 summit saw the financial markets sending mixed signals at the start of the trading week: stocks opened lower on Asian exchanges but clawed their way to modest gains late into overnight trading; the Japanese Yen showed initial strength as USDJPY gapped down 59 pips to open the week but has since reversed course to rise above Friday’s closing price; the US Dollar was a standout, gapping up to open 1.5% higher and retaining most of its gains going into European trading hours. The leaders of the world’s top 20 economies fell short of offering a set of specific policy responses to dealing with the increasingly likely prospect of global recession and the still-shaky financial markets. Although there were calls for a “broader policy response” including both fiscal and monetary measures, the statement disappointed those looking for globally coordinated action, saying that nations should act “as deemed appropriate to domestic conditions”. The bulk of the document focused on broader issues of international financial governance: leaders pledged not to raise trade barriers, promised more funds for the IMF, and set a March deadline for a specific set of recommendations on bolstering accounting standards and regulatory oversight of hedge funds and debt-rating agencies. Japan’s Gross Domestic Product issued a negative reading for the second consecutive quarter in the three months through September, shrinking an -0.4% having fallen -3.7% in the preceding period. This confirms the world’s second-largest economy is now in recession. A separate report saw the Tertiary Index measure of service demand fall -0.6% in September. The road to recovery looks arduous as dwindling global demand sinks growth in the vital export sector. Indeed, last week saw the Current Account surplus shrink -48.8% in the year to September. From a policy perspective, Japanese leaders are short on available options: monetary policy has little scope with interest rates already at a meager 0.30% and fiscal stimulus could be hit-or-miss given the Japanese consumer’s infamous proclivity to favor saving over spending. On balance, this likely means that murmurs about intervention in the currency market to suppress the Yen and boost exports are starting to make the rounds among officials. Australian Retail Sales underperformed expectations, adding a disappointing 0.1% in the third quarter versus economists’ forecasts for a 0.4% increase. Last week, business confidence fell to the lowest in 11 years and the Reserve Bank of Australia slashed its GDP growth forecasts, promising more interest rate cuts to boost stalling economic growth. The markets pricing in 150-175 basis points in easing over the next 12 months suggesting continued downward pressure on the Australian dollar. That said, technical positioning suggests a bullish correction may be in the cards before the dominant down trend resumes. Euro Session: What to Expect The economic calendar is fairly thin for the upcoming European session, with the Euro Zone Trade Balance report the only notable item on the docket. Expectations call for a deficit of -6.0 billion euro, equivalent to a near-87% deterioration in trading terms in the year to September. Cooling global demand has taken a toll on export growth, pushing the trade gap deeper into negative territory. However, there is a bit of room for an upside surprise should the broad EZ metric follow that of Germany: September’s trade report surprised to the upside in the currency bloc’s largest economy as the cheaper Euro boosted exports. The single currency lost a whopping 10.6% in the third quarter. To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.