By Dean Popplewell
In the dog day’s of summer the single currency movement is relentless, inching ever higher, squeezing the weaker short positions into submission and now beginning to test the wits of the long time negatively converted. It does not feel market natural the EUR being higher, however, the lack of investor interest has been making it that much easier. Positive surprises on the French (flat) and German GDP (+0.3%), albeit being minuscule, the fact that they were not to the downside or showing GDP in contraction is market proof that the core is very much independent from the “cliff diving” peripherals. Meanwhile, in the big picture, investors continue to hope that weak overall eurozone data will prompt the ECB into further monetary easing. Poor economic numbers are being cheered by investors who are betting on coordinated global stimulus. For them they are economically short sighted, preferring to favor short term gains in the face of long term pain.
Despite the euro core avoiding shrinking, the resilience of Germany and France has not been enough to prevent the single unit’s economy as a whole from falling back into contraction. Regional economic output fell -0.2% in Q2, making it more difficult for the European leaders to end the fiscal crisis any time soon. Basic economics expects rising unemployment and falling consumer and business sentiment to “worsen the regions public finances in many countries and in turn, push back debt-reduction targets even further, which will only heighten concerns amongst investors. Despite growth in Germany and stagnation in France, there are signs that both economies are expected to struggle in H2, further dampening any positive prospects for the remaining region. The eurozone is yet to fulfill economists definition of being in a recession, perhaps sometime soon?
Thankfully (rather economically perverse) at odds for now with this morning’s German growth data, the regular ZEW German sentiment indicator showed that the country’s economic expectation fell for a fourth consecutive month in August and managed to hit the lowest reading this year (-25.5). The decline suggests that the financial markets expects the German economy to cool down even further throughout the next six-months. The eurozone’s crutch is under pressure and by default so too is the rest of Europe. The Germany economy cannot be expected to continue to defy the euro zone’s worsening debt crisis. The ZEW current conditions index fell further to 18.2 from July’s unrevised 21.1.
Greece has completed it largest debt sale in two years this morning, making sure that it has the liquidity to repay bonds held by the ECB next week. The Greek Public Debt Management Agency sold +EUR4b at +4.43% 13-week T-bills. Funds raised are for ECB repayments so Greece does not default making it impossible for the country’s banks to carry on borrowing from the ECB. This being the institutions “only life source.”The sale is only buying much needed time. The country requires a lot more than 90-day bills. The auction results do not reduce the risk posed by Greece as whole. The short maturity raises no red flags. The risk is being temporarily shifted away from the euro region back onto the Greek Central Bank. Once the bailout funds have been paid and T-Bills redeemed, the pressure is back on Europe.
Market focus now shifts back to U.S. retail sales out later this morning (+0.3%). Analysts expect a bounce in July after three consecutive monthly declines. It’s being suggested that warmer weather is likely to have boosted durable spending (air conditioners), while non-durable components are due for a bounce after a weak three-month run. If the scenario runs through, then the data should be somewhat supportive for risk sentiment, although continued stronger numbers will cloud the prospects for QE3 in September as well.
The overall market remains relatively short in anticipation of deeper losses in the coming sessions.However, the weaker of these positions are slowly being squeezed. The retail sector sits somewhat neutral, with a larger outright interest demand off the pace at 1.23. Neutral sells appear at 1.2385 trough 1.2410, just ahead of more market stop-losses parked above 1.2420. Medium term bias continues to look to the downside, however, these lofty heights are beginning to become uninspiring.