EUR jumps on Spanish news, but Greek risks ahead

June 11, 2012 — Mitul Kotecha

Spain’s request for a EUR 100 billion bailout for its banks has significantly shifted the bias for markets this week, with risk assets buoyed and safe haven assets pressured. The fact that Spain will receive a bailout ‘light’ in terms of the conditions of the loan, will also have come as good news as the stringent measures associated with bailouts of Greece, Portugal and Ireland, will be avoided. Taken together with mixed (but less bad than feared) Chinese data over the weekend, the scene is set for markets to rally early in the week.

However, plenty of event risk remains, not least of which is the outcome of Greek elections at the weekend and results of French parliamentary elections today, which could easily reverse the positive mood of markets.

The USD has continued to head lower a trend that has been established since the end of May, with its drop set to accelerate at the start of the week following news of Spain’s banking bailout and the subsequent bounce in risk assets.

Although Fed Chairman Bernanke provided some relief for the USD last week by not indicating a desire to embark on fresh quantitative easing, the reality is that US data has been disappointing of late, keeping the door open to such action, restaining the USD.

More damaging to the USD is the bounce in risk appetite even before the Spanish news. Softer US data this expected week including likely sluggish May retail sales, a small increase in industrial production and lower manufacturing and consumer confidence surveys, will keep the debate on QE firmly open, leaving the USD struggling in the days ahead.

EUR/USD lurched higher following Spain banking bailout request. However, the sum of EUR 100 billion is far higher than the EUR 40 billion anticipated and could add around 20% to Spain’s sovereign debt. While the size of the package is significant it is also worrying, a fact that could come back and haunt the EUR.

Undoubtedly the upside in EUR is being helped by the fact that speculative positioning reached a fresh record low last week (according to the CFTC IMM data) leaving plenty of scope for short covering. In the near term EUR/USD will remain buoyed but any gains will be restricted to technical resistance around the EUR/USD 1.2690 level where sellers will emerge, especially given uncertainty surrounding the outcome of Greek elections.

Posted in eurozone, Spain, US. Tags: , , , , . Leave a Comment »

Spain moves to the epicentre

May 30, 2012 — Mitul Kotecha

Risk appetite has continued to firm but caution prevails. Rumours overnight of a Eurozone bank rescue fund (later denied) helped sentiment, but the ECB’s rejection of plans to recapitalise Bankia in Spain via an injection of EUR 19 billion of sovereign bonds and a downgrade of Spain’s credit ratings, once again brought a dose of reality back to markets. Additionally a Xinhau news agency report that China has no plans to introduce a major stimulus package will also dampen sentiment. Against this background it is difficult to see any rally in risk being sustained.

Admittedly equity valuations look more compelling, with the price / earnings ratio on the S&P 500 below its long term average, but that does not mean that now is the time to buy stocks or risk assets in general. The USD remains the winner on the FX front and will continue to edge higher over coming days and weeks, with the currency interestingly verging on a close above its 100 month moving average.

Once again the EUR has failed to hold onto gains, with the currency making lower highs and lows, dropping below 1.2500 overnight. Even a firmer tone to equity markets and slightly better risk appetite has failed to provide any support to EUR as Greece passes the baton to Spain as the new epicentre of market attention. A new poll showing increased support for pro bailout parties in Greece has helped to alleviate Greece concerns slightly there.

Today’s data slate in Europe will come as little relief to the EUR. A further deterioration in economic confidence surveys in May will only serve to highlight the growing growth disparity between the Eurozone and US although the surprisingly large drop in May US consumer confidence was hardly encouraging. The data will leave the EUR vulnerable to further slippage and follow through below 1.2500, with a test of technical support around 1.2300 on the cards.

Like most other currencies the sensitivity of USD/SEK to risk aversion has increased over recent weeks. According to my calculations it has been one of the most highly correlated currency pairs with Risk Aversion over the past 3-months. This has been reflected in the drop in SEK against the USD which accelerated during May. However, USD/SEK has stabilised lately while EUR/SEK has dropped sharply.

A further drop to around 8.95 (trend line from beginning April) is on the cards in the near term but further SEK gains are unlikely unless risk aversion improves. On the positive side, Swedish economic data is at least perking up as reflected in the bigger than expected jump in May consumer confidence yesterday. GDP data today ought to confirm that the drop in growth in Q4 will not be sustained, which will to provide short term relief to the SEK.

Posted in eurozone, FX, Greece, Spain, Sweden. Tags: , , , , . Leave a Comment »

Yuan band widening, Euro still under pressure, Yen firm

April 16, 2012 — Mitul Kotecha

The big news over the weekend was the widening in China’s CNY trading band to 1% from 0.5% previously. It is unlikely to have much of an impact on global markets, with the move not particularly surprising.

China clearly wants to add more two-way risk to the market and in this way the it allows the CNY to better reflect daily market conditions. Nonetheless, CNY is currently seen around equilibrium and appreciation pressure is limited , suggesting that intra day volatility will remain limited.

The USD index is trading around the middle of its range for the year and FX volatility has declined. Recent data disappointments have taken the shine off the USD and revitalized the debate on more Fed quantitative easing. Bouts of risk aversion have given some support to the USD but this has to be balanced against weaker US data.

It will require a renewed rise in US bond yields and an increase in risk aversion before the USD can strengthen anew. Data over coming days may offer some support but whether releases including retail sales, manufacturing surveys and industrial production prove sufficiently strong to boost US bond yields is debatable, suggesting another week of benign USD action.

EUR/USD remains close to its recent lows and is showing little inclination to move back up towards the top of its 1.30-1.35 range. Renewed worries about Spain’s fiscal/debt position as well as opposition to reforms in Italy threaten to keep the EUR restrained.

Data releases may actually regain some attention over coming days however, with the key April German ZEW and IFO surveys scheduled for release. The former is expected to fall slightly while the latter is expected to remain close to the March level.

Given that both surveys have been rising over recent months the outcomes will not prove particularly worrying. However, little change expected in both surveys suggests that the EUR will find little support either. EUR/USD technical support is seen around 1.2974.

Another trade deficit expected in March in Japan will support a JPY bearish view but in reality much of the reason for the deficit is not related to the strength of the JPY but rather external demand weakness and strong energy imports.

Nonetheless, the rise in the JPY over recent days will have fuelled renewed concerns among Japanese policy makers while piling on the pressure on the Bank of Japan to be more aggressive on its policy stance.

I suspect USD/JPY may have further to fall in the short term as its move corresponds with the narrowing in the US yield advantage over Japan. A drop below USD/JPY 80 looks increasingly on the cards.

Posted in China, eurozone, Japan, Spain, US. Tags: , , , , . Leave a Comment »

Euro edging towards year highs, GBP lagging

January 20, 2012 — Mitul Kotecha

Contrary to most expectations at the beginning of this week EUR has managed to claw back its losses and more, with the currency edging towards its year-to-date highs around 1.3069. The resilience of the currency to bad news in Europe has been impressive and its gains have reflected a speculative market that has been extremely short. The end of the week sees no key data of note so markets will have to contend with digesting the outcome of the relatively positive Spanish and French debt auctions while keeping one eye on Greek debt talks with private investors.

Unless there is yet another breakdown of talks in Greece the EUR will end the week on a positive note. I suspect it won’t last further out especially given the pitfalls ahead but at a time when investors have become increasingly bearish on the EUR it may just extend its bounce over the short term. One country to watch is Portugal whose bonds have underperformed recently as markets speculate that it could be the next contender for any debt writedown.

Retail sales data in the UK will capture local market attention today. Sales are set to have bounced back in December but the improvement is likely to be short-lived, suggesting any support to GBP will be fleeting. GBP has underperformed even against the firmer EUR recently but this is providing better levels for investors to take long positions versus EUR. In part this reflects the move in relative European/US interest rate differentials, which has been correlated with the move in EUR/GBP.

I expect GBP to outperform EUR over coming months to around 0.80, with the former continuing to benefit from the simple fact that it is not in the Eurozone and has therefore acquired a quasi safe haven status. Nonetheless, as reflected in the drop in Nationwide consumer confidence in December, this year will be particularly difficult for the UK economy. GBP will be restrained by the prospects of more quantitative easing by the Bank of England as inflation eases further

Posted in eurozone, Greece, Italy, Portugal, Spain, UK. Tags: , , , . Leave a Comment »

Resilient Markets

January 19, 2012 — Mitul Kotecha

Risk assets have registered a good start to the year despite ongoing tensions in the Eurozone. US stocks rose overnight, with the S&P 500 extending its rally to 4% year to date. Evidence that markets are becoming increasingly resilient to bad news emerged from the muted reaction to sharp downgrades in growth forecasts by the World Bank, with the world economy expected to grow by 2.5% this year compared to a June forecast of 3.6%.

US markets also reacted positively to news that the US NAHB Homebuilders index rose to its highest level in more than 4 years and while industrial output expanded, albeit less than expected. Markets will continue to keep one eye on earnings to ascertain whether the equity rally can be sustained, with at least 48 S&P 500 companies reporting earnings this week including Morgan Stanley Bank of America, Intel and Google today. So far, relatively more companies have fallen short of expectations than have beaten expectations.

Even in the Eurozone the news has been slightly more encouraging than of late, with reports that a deal between Greece and private creditors on the extent of debt writedowns could be reached by the end of this week. Moreover, the International Monetary Fund (IMF) is reported to be raising $500 billion in new funds for bail out funds, another factor that has helped to shore up market sentiment. The net result has been to see peripheral bond yields ease further and the EUR to strengthen, helped by the fact that the market is extremely short.

There is still plenty of event risk on the horizon, however, including debt auctions in Spain and France today although these ought to pass relatively smoothly. US data are likely to be mixed today, with benign inflation keeping the door open to more Fed quantitative easing (QE) while a gain in the Philly Fed manufacturing survey will continue to reveal signs of economic recovery. In the short term risk assets look supported but given the risks ahead any bounce still looks to be short-lived.

Posted in equity markets, eurozone, Greece, Spain. Tags: , , , , . Leave a Comment »
« Older posts
Newer posts »