ECONOMETER

Well the calm at the beginning of the week did not last very long.  Although the overnight price action can hardly be labelled as panic given both FX and equity volatility remain relatively well behaved, there is no doubt that worries are creeping back into the market psyche.  It seems that markets are once again trading on each piece of news and for the most part the news is not encouraging.  

A plethora of disappointments will set a negative tone for markets today.   Risk has come off the table in the wake of the worse than expected February German IFO business confidence survey and US Conference Board consumer confidence.   Cautious comments by Bank of England Governor King in which he kept the door open to further quantitative easing and a ratings downgrade of four of the largest Greek banks has added to the damage.

The German IFO was likely dealt a temporary blow by severe weather conditions.   The 10.5 point fall in US consumer confidence from an already relatively low level had no mitigating factors however, and revealed a deterioration in job market conditions, which combined with renewed weakness in jobless claims, does not bode well for next week’s US payrolls report, pointing to a decline of around 40k in February payrolls.

Overall, the market mood has darkened and there is little to turn sentiment around in the near term.  In prospect of likely weak reading for US payrolls next week and continuing worries about European fiscal/debt problems any improvement in risk appetite is likely to be limited.  This will help bond markets, the USD and JPY but most risk trades will face pressure. 

It is still worth being selective in FX markets.  The EUR remains the weak link and is set to struggle to make any headway, with upside likely to be restricted to resistance around 1.3747.  Similarly GBP is set to struggle in the wake of King’s comments as well as ongoing economic and deficit concerns, with GBP/USD vulnerable to a drop to around 1.5293.   In contrast, Asian currencies and commodity currencies look far more resilient.