- Stakes are rising in Korea conflict as Pentagon warns on nuclear missile capabilities.
- Bank of Japan's Kuroda stresses inflation target to be handled flexibly.
- International Energy Agency revises down oil demand projections.
Stakes Are Rising In Korea Conflict
An assessment by the Defense Intelligence Agency (DIA) made public yesterday concluded with ‘moderate’ confidence that North Korea has the ability to launch nuclear-armed ballistic missiles, though reliability will be low. Although the tough rhetoric from North Korea seems to be primarily an effort by the new leader Kim to consolidate his power base, tensions have spiked recently and South Korea, Japan and the U.S. are on alerts for an imminent missile test launch (see Reuters).
Bank Of Japan’s Inflation Target To Be Handled ‘Flexibly’
According to comments made yesterday by BoJ Governor Kuroda in an attempt to convince markets without risking his credibility, the inflation target is flexible and the strategy to double Japan’s money supply is not designed to manipulate the value of the yen, nor will it give rise to asset bubbles. The drastic step-up in money-printing operations in Japan, coupled with continued QE in the US, has spurred renewed capital inflow to China. Yesterday, China reported a USD128bn rise in its foreign exchange reserves to USD3.4trn, following three quarters where it was virtually unchanged. The surge suggests that China has resumed its FX interventions, in order to ease some of the appreciation pressure on the CNY.
International Energy Agency Revises Down Oil Demand Projections The IEA has lowered its 2013 estimate of European oil demand by 40,000 barrels/day, following a downward revision of 10,000 barrels/day in March. According to the IEA, the renewed debt woes caused by the Cyprus bailout are weighing on oil demand.
Recent Rally In Risky Assets Losing Speed
Risk sentiment remained buoyant throughout the US session, where the Dow Jones index and the S&P500 index both rose 0.4%. Asian shares are shedding some gains this morning, however, with particularly the Nikkei taking a breather after its strong run recently.
U.S. Treasuries Trading Sideways, Irish Yields Decline
U.S. Treasuries traded mostly sideways yesterday, after taking losses during the week, as discussions on tapering the Fed’s QE have continued despite the weak labour market report last week. During the European session Irish government bond markets received tailwind from speculation that the nation may receive an extension to the loans received under its bail-out package. Portugal may also see an extension, although the constitutional decision on the country’s austerity measures could be a hurdle. Hopes have risen that a deal to extend maturities may be reached at today’s Eurogroup meeting, see Financial Times and Bloomberg.
Dollar Loses Ground
USD has lost some ground overnight, causing USD/JPY to hover around 99.50, while EUR/USD has broken well above 1.31.
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