â€œFreaky Fridayâ€ or Friday the 13th did not disappoint. The week has ended very much in risk-off mode; with macro risk sentiment taking another step backwards. The â€œhighly accommodative rhetoricâ€ from Fed Yellen and the BoJâ€™s Shirakawa pursuit of â€œpowerful easingâ€ along with the ECBâ€™s Draghi requiring it, and the PBoC Zhou likely to demand it, has been trumped by disappointing Chinese growth numbers and Spanish CDS spreads widening to record levels. Now that Option traders have finally loosened the EURâ€™s noose, has allowed the â€˜single unitâ€™ to express its own negativity intraday Friday. With a number of market indicators showing a deterioration of risk appetite more broadly, notably implied volatility, credit and sovereign spreads, and equity prices, the market should expect further underperformance by global growth sensitive currencies from here.
Below are some other highlights of the week:
- EUR: Euro peripheral bond markets continue to show increasing signs of strain, with the Spanish 10-year yield printing levels reached in late last year. Ongoing pressure might cause the ECB to revive its bond purchase program, after ten weeks of inactivity. Analysts note that since Spain has already completed half of its funding for the year they â€œdo not expect this recent strain to have systemic consequences.â€
- GER: Two-year Bund yields trade below JGBâ€™s for the first time mostly on periphery concerns.
- GRE: Greek Vice-President Constancio announced that Greece is to publicize the terms for its banks’ recapitalization this week and that the date of the general election will be May 6th.
- SEK: Swedish IP fell -5.2%, m/m, in February, much worse than consensus for -0.3%. January’s reading was also revised lower to +3.3% from +3.6% previously. The main source of weakness was non-durable consumer goods production, down -32%, m/m. The OIS market implied probability of a rate cut at the next meeting rose slightly after the release.
- NOK: Norway’s inflation moderated to +0.8%, y/y, from +1.2% previously, touch below consensus for +0.9%. The underlying inflation rose to +1.5% from 1.3%. Analysts expect weak growth abroad and the strong exchange rate is likely to remain a drag on the domestic growth and inflation outlook. This should keep Norges Bank concerned, however, after the last rate cut surprise, the market is pricing for rates to remain on hold.
- EU: French IP rose +0.3%, m/m, in February, in line with consensus. However, previous months were revised lower and manufacturing production was weak, falling -1.2%.
- FRF: French business confidence was stable at 95, below expectations for a small improvement.
- OECD: The diverging mixed messaging on European growth from the OECD coupled with expectations of steady accommodative policy by the ECB are partial reasons weighing on the EUR this week. However, the single currencyâ€™s immediate woes can be attributed to the resurfacing of periphery sovereign issues. The ECBâ€™s LTRO seem to be wearing off. The recent rise in Spanish and Italian yields, especially following the poor Spanish auction results last week, points toward renewed EUR vulnerability as markets start to focus on the fiscal health and debt sustainability of Euro area sovereigns.
- UK: The RICS house price index rose +3 points from February to -10 in March, the highest reading since June 2010. Separately, the Lloyds Employment Confidence index improved to -58 in March from -69 in February.
- ECB: Coeure, who heads the ECBâ€™s market operations division, stated that pressure on Spain is not justified, and that bond buying remains an option. His comments only partially reassured investors that the ECB will act again if needed to stem the crisis.
- EUR: Mid-week, risk appetite tried to make a timid comeback after a stronger than expected opening to the Q1 earnings season in the US, â€œinterrupting a multi-day sell off across asset classes.â€ The market temporarily ignored the +1.9%, m/m, drop in Spanish IP and the weak outcome of the Italian bill auction. Italy auctioned +â‚¬11b in bills, with a mixed bid-to-cover ratio.
- EU: A 10-year Bund and a 5-year Gilt both disappointed. Currently, the more interesting of the two, was the technical failure of the German auction which went â€œuncovered.â€ It was the first uncovered auction this year (+1.77%-the lowest on record), a function of miserable yields rather than signs that Germany having trouble selling its own debt.
- NOK: Norway’s manufacturing production was weak in February, falling -0.7%, m/m. This follows a +1.1% gain in January. IP was down -0.6%, m/m, with a strong contribution from utilities but weak oil and gas extraction. Analysts note that the data should support the dovish bias of the Norges Bank, however, after the last rate cut surprise, the market is pricing for rates to remain on hold.
- UK: The British Retail Consortium (BRC) like-for-like retail sales rose for the first time in three-months last month, gaining +1.3%, y/y, after a -0.3% decline in both January and February.
- ITL: Italy sold +â‚¬4.88b in 2015, 2020 and 2023 bonds, allotting only +â‚¬2.8b of the 2015 paper against a +â‚¬3bn target. The Bond markets ended up ignoring the mixed auction outcome despite it being no surprise that Italy had been forced to pay up for 3-year product, with yields settling at +3.89% vs. +2.76% a month ago. Investors relied on a combination of firmer than expected indicators to apply some risk.
- EUR: EZ IP surprised to the upside growing +0.5%, m/m, in February. Despite beating consensus expectations for a -0.2% fall, the key EZ economies did not perform so well; Germany was down -0.2%, Spain -0.5%, while France grew only +0.2%. This is evidence that should not allow the ECB to stray too far from its dovish stance.
- SEK: Swedish inflation moderated to +1.5%, y/y, from +1.9%. Even the underlying inflation was stable at +1.1%. House prices fell -3.6% in February on a seasonally adjusted basis. Lower house prices and inflation leave a room for Riksbank to ease further.
- ITL: Italian IP fell -0.7%, m/m, in line with consensus. This follows a +2.6%, y/y, contraction in January and points to overall weak growth in Q1. Another nail in the EUR currency rise being capped?
- GBP: UK construction output fell -4.6%, y/y, in February. This print poses a significant risk to Q1 GDP. Weak construction is expected to shave -0.4% off the growth number. Is a negative Q1 print possible? If so, an uptick in QE pricing would begin.
- ESP: We end this risk-on, risk-off week with Spanish Credit Default Swaps rising to a record +498 points.
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