By Dean Popplewell
The majors are managing to hold the status quo in another uneventful overnight session. FX traders are equity watching, FI dealers are equity watching and the equity dealers are waiting for JPM and WFC to report their Q3 earnings release where there is an area of caution. So far, the US earnings season has disappointed and is encouraging investors not to throw caution to the wind. The release of these two titians numbers will give investors an insight into the health of the US financial system. The rest of us, who are not interested in equities, continue to speculate about whether Spain will request financial assistance from its European partners. This negative news so far has been taken as a positive for the single unit as it heightens market expectations of a Spanish bailout request and OMT. However, true to form, Spanish officials remain stubborn, their right, allowing this Iberian country to remain in focus right up to EU summit next week.
We should all agree that the US recovery should be approached with caution. There is a debate on the outbreak of optimism about a recovery in the US and its wants to gain traction. More copy is beginning to suggest that the US economy is in recovery and by default they are telling us what that means for the mighty buck. Just listen and you will hear the portfolio suggestions fly. It was literally only yesterday that everyone believed the US economy was down for the count. With a hail Mary and QE mix, it is now supporting US housing and growing exports suggest genuine economic rebalancing. The banter of owning US real estate or equities instead of the EUR is getting louder. It could be true, but one should not bet the house at this stage as there are still to many questions on where ‘real’ growth is going to come from. At best, global growth is tepid. Central banks are prepared to print money, but what we have not seen yet is any sustainable follow through from the fundamental real economy.
Euro industrial production rose in August for the second consecutive month this morning, driven by the uptick in output of durable consumer goods that tentatively suggest that the southern Euro economies may see better days. The print was a surprise (+0.6%, m/m but down -2.9% y/y)) and certainly fly’s in the face of the IMF’s actions of lowering the growth forecasts for the battered Euro region earlier in the week (-0.4% vs. -0.3%). Analysts note that the rise in output was the result of a pickup in the southern European economies that had been contracting as a result of austerity programs and limited credit. Perhaps the periphery region may avoid the sharp slowdown that many have been predicting? Later this morning in the US, we get to see the UoM preliminary September consumer confidence indicator. Consensus expects a 78 print, however, do not be surprised to see a small pullback to around 76. This too should have a limited affect on price action.
The action of inflating away debt is a non starter. Everyone knows that one of the ECB’s mandates is to keep the Euro-zone inflation below, but close to the +2% over the medium term. Policy makers are adamant that they will not allow a rise in inflation (think tax revenue) to help ailing Euro members reduce their debt burden. They prefer to rely on these governments to ‘pursue rigorous reforms to reduce their debt burdens.’ The reason the markets are questioning the sustainability of Euro-zone debt is primarily down to some investors or speculators forcing some member states to pay unjustifiable high interest rates. The EUR bid of late suggests that the market is comfortable with the message that the ECB’s OMT is a support. The program is playing the credible backstop role implying that the EUR is irreversible.
Failed attempts to breach the 200-DMA (1.2823) is keeping the EUR bulls happy. The tech’s have hung tight and are long around 1.2880 entered earlier in the week. Lack of liquidity in Wednesday O/N session attempted take these positions out, however, the market was capable of correcting itself to current levels where the risk reward continues to favor the right hand side. A 1.31 handle print remains the short term target.