Tuesday, July 12, 2011

EU Shockwave Overwhelms Sentiment


Last week’s slow leak in risk sentiment, picked up momentum. US equity markets were down a tad under 2% (-1.6% in Canada). Two percent declines were common in Europe. Italy, the newest front in the EU periphery shockwave, was down 3.96%. (Actually Italy was front and centre in the 2005/06 ‘drama’, and was then seen as the most likely candidate to crack the Euro area.) Given the risk-off tone, safe havens led: JPY, CHF and USD. Given the locus of angst, European currencies lagged: SEK, NOK and EUR. SEK in particular was the whipping post, dropping 2.5%. EUR/SEK remains ensconced above its 200-dma, USD/SEK is now above its 200-dma, CAD/SEK seems to have ‘pierced’ the range in place since January; AUD/SEK is above 6.9391, the double top from May 2010.


Maybe this will be another pop/fade, although AUD/SEK has shown a tendency to not revert to old lows after a firm move upward. Either way, keep watch. This has unfolded as EUR/AUD broke below 1.3229, the May low, opening the way to the December/January lows at 1.2928. Meantime, a number of risk/cycle-sensitive asset prices are again showing heightened nervousness, much like they were before the late June risk rally. In other news, the OECD’s leading indicator report points “to slowdowns in Canada, France, Germany, Italy, the UK, Brazil, China and India,” along with “tentative signs” of turning points in the US and Russia. Oh, and the Q2 earnings season kicks off, with the FOMC minutes to serve as a ‘teaser’ for Bernanke’s trips to Congress later this week.


EUR: EUR periphery spreads are undergoing another one of those violent widenings that tends to portend an endless string of emergency meetings of senior EU officials. Spain’s 10-year bund spread has widened to 335 bps (a new high), Italy’s is now over 300 bps (a new high) and Belgium’s (an honourary member of the EU periphery) is now above 160 bps (a new high). FYI, Italy’s was 160 bps in early June. EUR/CHF hit a new low, blowing through 1.18 toward 1.16725, and though it has moved back above 1.17, the prospects of a sudden reversal seem low. Ditto, EUR/USD at $1.4000, which leaves EUR/USD at the bottom of its range since early March. The 200-dma is at $1.3909, which serves double duty as the 50% retracement of the rally from the January lows.


CAD: Though CAD underperformed the safe havens, it outperformed the rest. Its performance was reinforced by a survey of Canadian firms, the Business Outlook Survey that can only be described as remarkably positive. Indicators focused on the economy decidedly improved, even though the survey was done late-May/mid-June, a period of peak market angst. And yet, Canadian firms turned decidedly more positive than in recent reports, including the balance of opinion on future employment that hit a new high at 53.0, or above levels during the oil patch frenzy in the middle of the last decade. Someone please forward the report to the ‘nervous Nellies’ at the OECD!! USD/CAD though seemed singularly unimpressed. Ditto OIS rates, which continue to suggest that the prospects of a rate hike by year are still, at best, 50/50. We’ve heard from the BOS, we now await the word of the Boss (BoC Governor Carney) in next week’s FAD and MPR.


GBP outperformed cyclical continental cousins, but struggled on its own. GBP/CHF lingers near all time lows, 1.3267, while GBP/USD is below the 200-dma at $1.6048, below $1.60, and spent some time overnight probing $1.5888, the 61.8% retracement of the December to April rally. In its Annual Report, the BoE maintained that inflation will fall back toward target during the next 2 years.


AUD and NZD were down, but did not have the careening visages of the Europeans. AUD marginally outperformed, leaving AUD/NZD flirting with 1.28, the mid-June, early January low.


Published: 11 July, 2011
written by: Bill Hubard , Chief Economist at Markets.com