Another day of indecision today as the market nervously mulls the upcoming ECB meeting and whether the reacting to the latest news is an exercise in futility.
European news was reasonably positive today, with heady Spanish employment gains (more on this below) and an Irish auction of 9-year debt that saw the country successfully auctioning sovereign debt on the open market for the first time in a long time at rates roughly comparable to those of Spain and Italy. The Euro continues to trade cautiously, however, ahead of this Thursday’s ECB meeting.
Spanish unemployment levels dropped an impressive -99k in June, but before we celebrate the dramatic gains, let’s realize that the data is not seasonally adjusted and large payroll gains always come with the summer season – though they are stronger this year than they have been at any time in the last 10 years (in turn, this came after a winter that featured the worst months for employment before and since the 2008-09 winter). Considering we’ve seen the wettest weather in England in the April-June period since record keeping began, one has to believe that anticipation of northern European sun-seeking may be playing a part in the strength of the seasonal gains. Let’s stay tuned for further data – July and August are the biggest tourism months by far.
Chart: EURUSD
EURUSD of late seems to be all about “fading the last big reaction” with the previous three huge bearish engulfing days all failing to indicate further weakness (save for the last one , though there was no momentum in the follow on sell-off ahead of last Friday’s rally). Will the same go for Friday’s rally? Thursday’s ECB meeting and its immediate aftermath should tell us whether we can make a break one way or another (1.2700+ or 1.2300-).
Elsewhere, today, the news was rather thin, with the neutral RBA failing to spark movement in the Aussie, which means the currency will continue to take its directional hints from the overall direction of risk appetite. Indeed, it seems as if everything is too passively correlated with everything else of late, and as such, there is virtually nowhere to hide in terms of diversifying risks. Be careful on that front.
Looking ahead
The market is trading nervously ahead of the ECB meeting as we ponder whether last week’s big reaction to “developments” at the EU summit will represent the fourth time in a row that the market tries to react to the headlines with no real follow through. Is the market going to get back its energy sometime soon or are we headed for the summer doldrums, a mind-numbing range trade? Recent patterns in the market suggest the latter, but it’s hard to see how the market can stand the uncertainty for that long a period of time.
Look out for the US ISM non-manufacturing survey out tomorrow – a surprise there of the same magnitude as the manufacturing survey is a far more serious sign of economic deterioration in the US than was yesterday’s ugly surprise. It will be interesting to hear what the Riksbank has to say tomorrow about the Swedish krona, if anything, as the currency nears its strongest level in 10 years against the Euro while core inflation dips below one per cent again and the important manufacturing sector PMI is shrinking. The strong krona could begin to hurt a bit if the trend deepens, as it should if EU woes continue.
Economic Data Highlights
Australia May Builing Approvals rose +27.3% MoM and +9.3% YoY vs. +5.0%/-13.2% expected, respectively and vs. -23.0% YoY in Apr.
Australia RBA left rate unchanged at 3.50% as expected
Spain Jun. Unemployment decreased -98.9k vs. -51.6k expected and -30.1k in May
UK Jun. Construction PMI out at 48.2 vs. 52.9 expected and 54.4 in May
UK May Mortgage Approvals out at 51.1k vs. 50.0k expected and 51.6k in Apr.
Euro Zone May PPI out at -0.5% MoM and +2.3% YoY vs. -0.3%/+2.5% expected, respectively and vs. +2.6% YoY in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
US Jun. ISM New York (1345)
US May Factory Orders (1400)
US Weekly API Crude Oil and Product Inventories (2030)
US Jun. Total Vehicle Sales (2100)
UK Jun. BRC Shop Price Index (2301)
Australia Jun. AiG Performance of Services (2330)
Australia May Retail Sales (0130)
China Jun. HSBC Services PMI (0230)
John J Hardy,
SAXO BANK