Drones at dawn


It is difficult not to see the argument about the American drone as a (slightly) more grown-up version of a playground squabble about a ball. "It's mine, give it back!" "No it's mine now, yah boo sucks!" "Well I didn't want it anyway." The event has alarmed investors.

They are concerned at more than one level. First, they see China's seizure of the US naval drone as a possible escalation of Beijing's efforts to claim the South China Sea as its own. Second, they see what the New York Times describes as the White House's "muted" response as symptomatic of America's withdrawal from the world stage. Third, they are perplexed at the president-elect's contribution to the debate: "We should tell China that we don't want the drone they stole back.- let them keep it!"

The event has had a mostly negative impact on emerging market currencies and on the antipodeans, with the Aussie and Kiwi putting in the weakest performance since Friday morning. Both are down by almost two and a half cents, about -1.4% and the US dollar lost half a cent. As usual when investors are nervous, the Japanese yen came out with the best result, adding half a yen against sterling.

All quiet on the Western front

The developments in the Far East spoiled what had promised to be a quiet end to the week.  The Bank of England had left monetary policy unchanged on Thursday and there were no big surprises from the economic data. Sterling did not get involved in any fights and shared second place for the week with the Swissy.

Friday's European ecostats were pretty much limited to trade and inflation. In the euro zone inflation was steady at 0.6% and the trade surplus narrowed. In Britain the Confederation of British Industry reported that manufacturers' order books were flat in early December, an improvement on the expected decline. 

An equally sparsely-populated agenda in North America showed US housing starts and building permits both falling in November while the flow of foreign investment into Canada increased. 

Festive countdown begins

With only six shopping days to go before Christmas investors will not be going out of their way to get any more involved in trading than is necessary to tidy their positions in readiness for year-end. There are few important ecostats between now and then.

New Zealand kicked off this morning with an improvement in consumer and business confidence and a 2.6% increase in building permits. Japan reported a bigger merchandise trade surplus as imports fell more quickly than exports.

This morning IFO is expected to show German business confidence as being almost unchanged in December and the EC reports on construction output and labour costs. There will be a couple of provisional purchasing managers' index readings from the States after lunch and the NZ food price index comes out this evening. Early tomorrow the Bank of Japan makes a policy announcement: no change to interest rates is likely.