With no further deterioration in the Russian/Ukraine crisis, coupled with a quiet day ahead in terms of limited economic data being released stateside, only leaves geopolitical factors and the ongoing release of US quarterly earnings news to provide investors and dealers direction in the market. US Treasury’s have moved lower on a broad but “mild risk on” move ahead of what’s expected to be a stronger NFP print this Friday (+207k). Even the price of gold, considered to be a “safer haven,” remains on the back foot ($1,290 – down -0.5% from the previous close). Waning physical appetite for the “yellow metal” from the Far East is expected to be the biggest obstacle for all those long the precious metal going forward. Even the forex market remains unexcited – confined to a tight trading range waiting for more concrete guidance.
Eurozone business confidence across the 18 members that share the single currency fell this month, likely reflecting growing tensions between the EC and Russia over Crimea. The Economic Sentiment Indicator – which measures confidence levels in a number of business sectors and among consumers – fell for the first time in 12-months (102 vs. 102.5). The decline remains broad based. While rising tensions over Ukraine explains some of the loss of optimism, there was also evidence that the EUR’s appreciation was weighing on manufacturers. The Eurozone measure of confidence in industry fell to -3.6 from -3.3 – consensus was expecting a rise to -3.0. Not surprisingly, manufactures have reported a fall in their export order books, citing that they are less competitive on world markets than they were three months ago.
The EUR has taken flight this week with the market mostly blaming Russia – the easiest of outliers. The firmness could be attributed to Russian demand and to market talk of rebalancing some of the dollar reserves into EUR’s. The markets belief that further quantitative-easing by ECB’s Draghi and company is not imminent and is relatively unlikely for now has also being supporting the single currency on pull-backs. The EUR has nudged higher following German regional data, which showed a pickup in annual inflation. Today’s figures suggest that Euro deflation was ‘not’ just around the corner. However, all eyes are on tomorrow’s Euro inflation data being reported, any softness will raise expectations for more ECB easing and dent the common currency recent ride higher (€1.3885).
Helping the EUR’s cause is the fact that the Euro-zone’s money market remains tight with EONIA (overnight rates) once again jumping higher, averaging +0.398% vs. last Friday’s close of +0.331%. Fixed income dealers have indicated that the elevated rates are very different to previous month-end scenarios – suggesting that the “decline in excess liquidity is dominant as opposed to month-end demand.” However, other data reported this morning raises some fundamental doubts about the region. The Eurozone’s loan data should be raising a few red flags about recovery. The regions March annual loan growth to the private sector actually fell this morning, -2.2% versus -2.1% consensus. The slip in loan data suggests that the growth recovery amongst the members may not be sustainable – M3 at +1.1% versus +1.4% consensus indicates little or no inflationary pressures. Tomorrow’s flash Euro CPI should be capable of sending a number of positions on the correct path. ECB’s Draghi on a number of occasions has said he is considering unprecedented measures from negative interest rates to QE to avert the risk of deflation as he guides the euro area through a gradual economic recovery. To date, Government officials in Germany have been among the strongest opponents of his more radical policies amid concern the ECB will overstep its mandate.
The UK economy is still strong – this morning’s Q1 GDP report showed growth at +0.8%, a tad weaker than expectations (+0.9%). The report would suggest that the “slack” in the UK economy is being removed, but for now the BoE believes that “considerable” slack remains (there is no consensus on “considerable”). Governor Carney sees it in the labor market. The minutes from the MPC April meeting indicates a “range of opinions” on the amount of slack remaining, as well as on medium term inflation. However, do not expect next months BoE meeting and inflation reports to offer a “less” unanimous MPC. There is potential for a couple of members to discuss an early rate hike. The next meeting will be operating under the “Forward Guidance II” regime – that is where ‘guidance’ will be thresholds and knockout free. This is expected to promote more active discussions amongst committee members.
For the sterling trader, now that Cable printed a new multi-year high yesterday (£1.6858) certainly unlocks the psychological £1.7000 handle to be tested. With the 30-day lower and upper Bollinger bands diverging highlights the scope for a bullish resumption. The market continues to be a better buyer of GBP on dips – so far this week prices have been supported more by potential M&A rumored activity than anything else.
Euro And Sterling On The March