Tin hats and sandbags

Unintended consequences

As well as politically-correctly equalising the alcohol recommendation for men and women, the government has said that to imbibe even the tiniest quantity of strong drink is dangerous.  In that case, might as well forget the five-a-day limit and go for it. And China's 7%-a-day limit didn't work either.

Price limits and circuit-breakers have long been a feature of financial markets. Their aim is to prevent excessive price movements by bringing trading to a halt when the limit - usually a daily limit - is reached. The idea is to give investors a cooling-off period before the market reopens. It can work, especially when the rule is a long-standing one to which investors are accustomed. But introduced on the fly, in response to falling prices, its effect can be the opposite to that intended: Investors feel under pressure to dump their unwanted assets before the circuit-breaker kicks in. That happened twice last week on the Shanghai stock exchange.

On Thursday the exchange realised its error and scrapped the circuit-breaker. So the market did not fall far today, leaving it down by -15% for the year to date. Today's decline was enough to unnerve investors and put the skids under "risky" currencies such as the antipodeans and the South African rand. The rand was trashed this morning, falling by -4%. The NZ dollar was down by -1.3% on the day and the Aussie by a relatively benign -0.6%.

No consequences

On Friday the US Bureau of Labor unveiled the strongest monthly employment data of 2015: Nonfarm payrolls jumped by 292k in December and were augmented by a 50k upward revision to the numbers for October and November. The US dollar did strengthen after the announcement but not by much.

In other circumstances the stonking payrolls figure would have sent the dollar higher, on the rationale that strong employment would ease the Federal Reserve's path towards higher rates. But we've been there, done that now. The Fed raised its Funds Rate last month and more increases are expected this year. Now, the cockeyed logic has it that strong employment = higher interest rates = downward pressure on equity prices. If not quite a reason to sell the dollar, the fear of fading US share prices is not much of a reason to buy it.

As usual, the abandonment of risky assets was matched by the take-up of safe ones, notably the Japanese yen, which strengthened by 1.5%. Sterling was somewhere in the middle, just about unchanged on average. 

Inflation and sales

Today's most important statistic came out as London opened, with Swiss December retail sales down by -3.1% from the same month in 2014.  There is little else on the agenda.

Chinese producer prices fell by -5.9% in the year to December and inflation was a tick higher at 1.6%. NZ building permits issuance slowed in November, increasing by 1.8%.

Yet to come are Norwegian inflation, Euroland investor confidence and Canadian housing starts.