Has the month-end distorting of prices already begun? The single currency has managed to punch through that psychological 1.35 barrier like a "hot knife through butter" just as other asset classes stood still. There has been no helping hand from equities, commodities or fixed income. Technical demand from EUR/JPY and EUR/GBP has managed to lift the 17-member cultured currency to take out the 1.3525 barrier. True to form, the EUR has maintained its momentum this week after the ECB has been willing to maintain its favorable outlook. Also today, the market gets to question the FED’s outlook.
This is a technical driven move for the EUR, overnight fundamentals would prefer to hinder rather than help the currency. A disappointing preliminary Spanish reading of gross domestic product for Q4 should have been capable of stalling this EUR rally.
Spanish GDP fell -0.7% from the previous quarter and -1.8% from the same period last year. This headline print was slightly worse than the reading from the Spanish Central Bank last week. It seems that analysts believe that the Q4 result should be the worst of it for Spain, despite predicting further contraction throughout 2013. A recent development in leading indicators is being used to support this prediction.
How much trouble is Spain really in? Already this week we saw unemployment confirmed at +26%, December retail sales plummet, and in line with the recent trend hindered by higher VAT rates implemented in September. Now one of the autonomous communities of Spain, Catalonia is asking for another handout.
The Spanish region has requested +EUR9b from the country’s liquidity fund. Last August they received +EUR5b. It seems the symptoms are getting more pronounced for the EU’s fourth largest economy. Periphery spreads are telling us not to be worried ... just yet.
Eurozone consumers and business became less pessimistic about their prospects this month, but they still do not feel confident enough to increases spending to get them out of this dire economic cycle. This is the crux of the problem. Central Banks have been relying heavily on the consumer to spend their way out of the crisis, and three years later we are still talking about it.
Improved sentiment data “echoes a shift in mood among investors”. The "proof is in the pudding," the EUR is higher as too are equities and bond prices. The EC’s Economic Sentiment Indicator rose to 89.2 from 87.8 last month. It was the third consecutive rise and currently sits at its highest level in 12-months. If sustainable, the revival in business confidence should logically lead to a rise in investments and new hiring. However, it’s a phenomenon yet to be seen!
The main event today stateside will be the FOMC meeting results, which should be somewhat less eventful than last month.
FOMC statement and rate announcement is at 2.15pm EST
•Market consensus has the Fed’s policy taking no action whatsoever.
•The December minutes released at the beginning of January indicated that some Fed officials saw QE3 concluding “well before the end of this year.” At the time, this allowed the market to speed up the pricing of winding down QE3 and the timing of U.S.’ first-rate hike. The market now seems to agree that the pricing has been overdone. The market will be looking forward to the January minutes released in three weeks for clarity.
•The most anyone expects to come out of this meeting is perhaps further clarification, if any, of its intentions moving forward of purchases and/or selling of assets from its balance sheet.
•The main difference and the predominant reason for the current EUR bid market is the perception that the ECB is actually taking/paying down debt on its balance sheet. The market is now taking its cue from the ECB’s new scheduled LTRO announcements every Friday (European banks three-year loan payback releases).
•The FOMC debate, if any, will focus on potential losses that may be suffered by the Fed from asset and debt pricing (Falling bond prices and rising interest rates). This market should not be hung up on re-pricing. It’s basically an investor perception argument.
•Remember, the Fed has the printing press and will print enough monies to cover losses. Alternatively they can hold the securities to maturity, thus erasing the loss. It’s a perception issue for investors; they are incorrectly focusing on profit and loss columns.
•Fed to push on with purchases of $40b of MBS and $45b a month of Treasuries despite some market criticism that the Fed will eventually be in a tight spot. A balance sheet expansion will eventually impair efforts to tighten policy when necessary.
Ahead of the Fed, we get a taste of U.S. Q4 GDP data. The market anticipates a slowdown to +1.1% annualized rate. Expect some temporary factors to explain away some of this fall. One cannot argue with Hurricane Sandy, let's hope a once in a lifetime anomaly, and perhaps other fundamental factors such as a wider trade gap.
How negatively will this market react to a similar headline? Let's hope investors take into account this month’s showing possible signs of re-accelerating before they decide to sell "the house"!
Another reason for the current support of the EUR this morning is that the ECB allotted only +EUR3.71b to eurozone banks at its three-month re-financing operations. The volume is less than the +EUR6b maturing tomorrow.
The lower than expected bid is partial proof that the banks that indicated last Friday that they would pay back the +EUR137.16b on the three-year loans two-years early are genuine.
So far this morning, 1.3550 was December 2, 2011 high, and is adding technical significance. Event risk now moves to the U.S.’ GDP and FOMC.