Spanish Election Upset Could Stress The Euro

As the holiday week begins trading volume is expected to decline steadily as traders move to the sidelines to prepare for extended vacations. The calendar is light this week and there is virtually nothing listed next week. Outside of geopolitical volatility and shifts in sentiment trading is expected to be demure. This morning investors listed carefully to the Bank of Japan monthly report and saw a better than expected print on business confidence in New Zealand.

Japanese stocks fell in thin trading on Monday morning as the yen gained against the dollar, putting pressure on exporters after the Bank of Japan disappointed markets with minor adjustments to its massive stimulus program.  The Nikkei share average fell 1.7 per cent to 18,673.72 during mid-morning trading. “Markets weren’t impressed by the BOJ’s actions on Friday and currently that alone is enough to see the index capitulate,” said Martin King, co-managing director at Capital Advisors.

“I don’t think we are going to see 18,565 breached this year but a macro environment of socio-political unrest, terror, commodity price volatility and central bank intervention will have many investors exercising caution as the exuberance of the past three years is nowhere to be seen.”

On Friday, the BOJ announced it would maintain its massive stimulus while expanding the types of assets it purchases – a move some investors believe might delay expansion of the quantitative easing program which has underpinned stocks. Sentiment took a further hit as US crude oil prices dipped toward last week’s 2015 lows after a rebound in drilling activity threatened to add to the current glut.

The yen is trading at 121.21 against the greenback and at 131.70 against the share currency.

The best trading currency this morning was the commodity linked New Zealand dollar. The kiwi is exchanging at 0.6746 gaining 19 points.  The Westpac consumer confidence index rose to 110.7 in the December quarter, from 106 in the September quarter, coming in slightly below the historical average of 111.5. A reading above 100 indicates optimists outweigh pessimists. The Reserve Bank responded to a slump in dairy prices this year by embarking on an easing cycle in June, cutting the official cash rate four times to reach 2.5 percent in this month’s review and projecting an unchanged policy for the next three years.

The euro slipped marginally last week, but moved mostly sideways into the ides of December. EUR/NZD was the worst performing EUR-cross, finishing lower by -1.25%, while EUR/GBP was the best performer of the lot, gaining +1.03%. The euro traded lower around the Fed’s rate decision, but maintained its post-ECB swing lows near $1.0800 from earlier in the month. The euro is sitting at 1.0865. Going into the end of the year, conditions in the market have become rather sensitive to the “next” policy moves from the ECB and the Fed. There is a 50 percent probability the Fed will raise its benchmark by its April meeting, and a 68 percent chance by its June gathering, according to data compiled by Bloomberg based on futures. Policy makers increased the rate to a range of 0.25 percent to 0.5 percent on Dec. 16 after keeping it at a record low since December 2008.

The elections in Spain have yet to have a market effect, but the outcome might push the euro lower.  Sunday’s election left Spain mired in even deeper political uncertainty than before, with experts calling it “near impossible” for Prime Minister Mariano Rajoy to find the political bedfellows necessary for a coalition. The country’s lack of an undisputed majority saw the euro little changed in Asian trading on Monday, with the common currency flat at 1.0868, but it could widen periphery-Bund spreads, warned Mizuho Bank in a note.