FX5: Risk Aversion Dominates Euro Session

Tuesday March 22: Five-things the markets are talking about

The equity market’s big swings have greatly subsided, leaving many wondering – what is next?

Major indexes drifted higher yesterday in a quiet trading session, as investors seemed to shy away from making any ‘big’ bets at the start of this holiday-shortened trading week. With earning’s season virtually complete and with Good Friday widely observed globally, there is little incentive for many to go out on limb this week.

Nevertheless, Euro equity indices are trading lower on increasing risk aversion after several terrorist related explosions occurred in Brussels during this morning’s session.

1. Markets react to Brussels bombings

With two bombs explosions ripping through Brussels airport departure hall a few hours ago has upped safe haven demand for various assets.

Investors naturally gravitate towards safer assets in times of uncertainty or stress.

German Bunds are rallying. The yield on benchmark 10-year German Bund was last down -0.03% at +0.19%. Other historical haven assets are also gaining, with gold up +0.8% on the day at $1,254.70 and USD/JPY down -0.5% at ¥111.55.

The USD has strengthened against most other currencies, up +0.4% and +0.7% against the EUR and GBP at €1.1197 and £1.4260, respectively as we head Stateside.

2. Japan Manufacturing PMI back in contraction

Japan’s March preliminary PMI fell to its lowest level in two-years overnight (49.1 vs. 50.5e), returning to contraction for the first-time in 12-months.

Disappointing PMI comes hot on the heels of an ongoing dispute about Japanese fiscal policy and the need to postpone the next round of PM Abe’s sales tax.

Finance Minister Aso reiterated that he does not believe fiscal action is required just yet and that Japan’s economic fundamentals remain solid.

However, not all government members are that resolute. Cabinet Secretary Suga indicated last week that he had not ruled out any delay to the proposed sales tax hike, stating that the government should in fact delay the hike if revenues fall.

3. German data

Germany’s ‘composite’ PMI came in unchanged for this month this morning at 54.1, mostly on the back of robust growth in the services sector and this despite weaker manufacturing activity.

The ‘services’ PMI rallied to a three-month high of 55.5, but its manufacturing equivalent fell to 50.4, a 16-month low. This would suggest that German economic momentum remains somewhat sluggish. Analysts note that slowing new order growth is being accompanied by the “weakest increase in backlogs of work since the last summer.”

Yesterday, Eurozone consumer confidence weakened for the third consecutive month (-9.7 from -8.8 m/m). The consensus were looking for a rebound, instead, it was the lowest print since December 2014.

Weakening consumer confidence threatens to derail the eurozone recovery, since household spending has been one of its main supports since the return to growth in mid-2013.

A stronger-than-expected German March Ifo business climate index (106.7 vs. 105.7) is helping the DAX index bounce higher from its intraday low as the market heads Stateside.

4. U.K February CPI improves, but miss expectations

U.K data this morning showed annual inflation held steady last month. This supports Governor Carney’s case at the Bank of England (BoE) for keeping interest rates pegged at record lows.

Consumer prices rose by +0.3% y/y in February vs. market expectations of +0.4%. The details indicate that a rise in prices for alcohol and clothes were offset by a decline in transport prices and food costs.

Sterling traded weaker early in the session to test its intraday low of £1.4255 as dealers suggested that this morning’s Brussels attack could support the campaign in U.K to leave EU.

Nevertheless, the pound is trying to shake off the missed CPI data expectations just ahead of the NY morning.

5. Canadian Fiscal Budget

Later this afternoon new Canadian Liberal PM Justin Trudeau will present his government first fiscal budget.

Currently, the street expects Canada to post a deficit in the region of C$30-32B as PM Trudeau emphasizes domestic infrastructure spend (C$15B) to help kick start an economy ravaged by an 18-month commodity slump.

Thus far, the proposed details seem to be well signposted by the government and therefor the “expected” fiscal spend and deficit is not anticipated to have a material impact on the loonie (C$1.3065) on the announcement.

The immediate threat to the CAD would be if today’s budget shortfall happens to deviate ‘too’ far from the already telegraphed headline. The loonie has remained better bid of late on the back of firmer commodity prices, especially crude oil (WTI $41.03) breaking back through the psychological $40 handle.

Do not expect the Bank of Canada (BoC) to act anytime soon. Today’s budget is expected to keep Governor Poloz on the sideline, as Canadian policymakers will want time to assess the impact of PM Trudeau’s new proposed measures on Canadian economic data before being reactive.

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