US Dollar Supported as Stocks Tumble in Asian Trading (Euro Open)

Key Overnight Developments

• UK House Prices Supported By Low Supply, Stabilizing Demand Says RICS
• Australian Business Confidence Rises on Government Stimulus Efforts
• Japan’s Leading Index Rises for Second Consecutive Month in April


Critical Levels



The Euro moved lower in overnight trading, slipping as much as -0.6%. The British Pound followed suit, slipping as much as -0.7% against the greenback. The US Dollar gained ground against most forex majors as stocks slumped nearly 2% across Asian exchanges on concerns that the recent rally has taken prices too high relative to expected earnings.


Asia Session Highlights



The Royal Institution of Chartered Surveyors (RICS), a UK property professionals’ organization, that the balance of polled real-state agents reporting falling house prices printed at -44.1% in May, the lowest in 18 months. Looking at the details of the survey, 6% of respondents said prices rose while 52% said prices remained the same; 42% said prices had fallen from the previous month, the smallest percentage since November 2007. RICS spokesman Ian Perry said “the housing market [appears] top be close to bottoming out with activity picking up in a material way and prices at last stabilizing.” Perry did qualify his optimism, however, saying “it is important to remember that the lack of supply has been as important in underpinning prices as the rise in demand.” Indeed, the number of properties on agents’ books fell 35% in the year to May, the largest annualized decline in 5 years.

Australian Business Confidence rose to -2 in May from -14 in the previous month, the highest level in 15 months, according to National Australia Bank. The improvement is likely linked the government’s plan to spend A$22 billion on infrastructure projects as part of the fiscal stimulus effort to boost the economy amid the global recession. NAB chief economist Alan Oster said that the May result reflects “hopes of a government investment-led recovery, with construction industry confidence leading the way.” The Australian Dollar largely ignored the announcement: the effects of the government’s programs have largely been priced in after GDP unexpectedly grew in the first quarter, so the real question going forward will be whether Australia is able to sustain positive momentum after the flow of stimulus cash dries up.

Preliminary estimates of Japan’s Leading Index saw the metric rise less than economists expected (77.2), printing at 76.5 in April from a revised 75.5 in the previous month. The reading is based on an average of 12 leading indicators including inventory ratios, machinery orders, and stock prices; it is designed to foreshadow the direction of the broader economy over the forthcoming 6-9 months. The print marks the second consecutive month that the index has advanced having set a record low at 74.4 in February. Still, the index is down 17.2% from a year ago, suggesting that a meaningful rebound in the pace of economic growth remains a distant prospect.


Euro Session: What to Expect



Germany’s Trade Balance is expected to narrow to 9.3 billion euro in April from 11.3 billion in the previous month as exports fall -0.1% while imports add 0.5%. The slump in global demand has weighed heavily on overseas sales of manufacturing goods, Germany’s top export commodity, with outbound shipments down over 21% to date since peaking in October of last year. Further weakness is likely ahead: Factory Orders falling a greater-than-expected -37.1% in the year to April and Industrial Production is set to slump -20.5% within the same period; meanwhile, the International Monetary Fund has predicted that world trade volumes will contract -11.0% this year and recover just 0.6% in 2010.

Turning to the UK, UK House Prices likely fell -13.3% in the year to April according to the Department for Communities and Local Government (DCLG). The reading marks a shallow rebound from March’s record-setting -13.6% annualized drop, though prices have a long way to go before a meaningful rebound can be ascertained. Further, as noted by RICS in the latest house price balance survey (above), stabilizing property values owe as much to lackluster supply as firming demand, meaning it is far too premature to expect a robust improvement in home prices to boost owners’ net worth and meaningfully improve the spending climate.

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