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Daily Insights - October 31, 2014

European banks extend losses

  • The New Zealand dollar was again a big underperformer, as the RBNZ held rates steady with a more dovish statement.
  • Brazil delivered a surprise 25bp rate hike as higher-yielding EM currencies are again facing headwinds. We also think Russia’s central bank will hike rates by 25bps at Friday’s meeting, with a significant risk of an even bigger rate increase.
  • Our view that the JPY will stay weaker is partly driven by expectations of portfolio outflows from Japan, with the focus on the Government Pension Investment Fund (GPIF). We also think life insurance company hedging behaviour and outflows from households should be watched. At Friday’s BoJ meeting, we still expect it to drop the two-year horizon for reaching its 2% price stability target.
  • Asian ex Japan equities have staged a minor recovery since the middle of the month, probably helped by lower oil prices. That said, better growth is likely needed to sustain the bounce. Data remain mixed, with Korea’s latest industrial production data a big disappointment. Monday’s global manufacturing PMI data will be the next key focus.
  • Today’s market focus will be preliminary Q3 GDP data for the US, where we and consensus expect a 3% saar rate (following 4.6% in Q2). It is also a busy earnings day, with nearly 1/10th of the S&P500 reporting. A decent earnings season has provided some stability to US equities.
  • In Today’s Focus, we examine a framework for analysing inflation scenarios, including deflation risk, and look at the potential cross-market implications.


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