“One picture is worth a thousand denials” – Ronald Reagan
The market still appears to be battling with the concept of ‘risk on’ meaning a higher USD, largely because it held the exact opposite relationship for most of 2011. Market activity remains surprisingly light and ranges surprisingly narrow given the magnitude and diversity of events driving the financial markets at the moment.
The data calendar has been fairly light this week so far with the German trade balance the highlight. The figures themselves show an improvement in export demand that has driven a widening of the surplus, however imports declined, highlighting the fragility of the German (and by default) Eurozone consumer as the uncertainties continue. Falling industrial output from the Eurozone’s strongest state, however, lead many commentators to talk of double dip recession across the union.
Private banking?
I will steer clear of any comment on the situation of the resignation of the Swiss National Bank (SNB) head Philipp Hildebrand and indeed the events leading up to it. Suffice it to say that up until this point, the market had been ‘pricing in’ an increasing chance that the SNB would raise the EURCHF peg higher again (from its current 1.20 level). However, the complications surrounding the Hildebrand situation and the fallout for the SNB mean that a further rise in the level of the peg is less likely. Ironically, the market unwinding its positioning for a further rise in the peg, may put the current peg level at 1.2000, and by definition the SNB under intense pressure!
The events in the Eurozone continue to be the major driver of sentiment and the issue of Eurozone bank ‘savings’ (or the amount of cash the Eurozone banks put on deposit with the European Central Bank – traditionally this money would have been lent to other banks / institutions on the interbank markets) continues to reach record levels, which are now approaching EUR500 billion. Mario Draghi, at the ECB press conference last month warned that this was dampening the transmission of monetary stimulus and may have even been a factor in the ‘monetary bazooka’ of the unlimited three-year Long-Term Refinancing Operation’s ‘non-standard measures’.
Tail wagging the dog?
In fact having discussed in previous blogs the fact that large multi national corporates may be emerging as better ‘credits’ than many sovereigns – recent information suggests that blue chip multi nationals have been lending money to Eurozone banks via repo markets – a channel exclusively limited to banks historically.
Sterling strength?
After the stronger service and manufacturing survey data from the UK in December, January has continued to offer reasons to be cheerful on the UK. Overnight retail sales and housing data both showed month on month improvements and significantly outperformed expectations. I will be publishing a more detailed insight into my views on GBP for 2012 shortly, but suffice it to say my current view on GBP is firmly in the ‘glass half full’ camp.
With limited data on the day again today the market direction will be driven by sentiment. Yesterday’s statement from Merkel and Sarkozy failed to deliver anything…well failed to deliver anything at all. Unfortunately despite the hopeful EUR buying or short covering by some in the build up to such statements or announcements, Eurozone officials have continued to disappoint with substance over the past months – to the detriment of the EUR and the credibility of the Eurozone.
Neil Staines,
SAXO BANK