The European sovereign crisis has years to run. But the immediate danger is past.
We learned two things from Friday’s US data releases: That the month after a surprisingly strong payroll report, we should brace ourselves for weakness, and services paint a different picture of the global economy than manufacturing. On a trend basis, the US is generating between 150k and 200k jobs a month. Enough to get the unemployment rate down, but only painfully slowly. Enough for an economy to grow at more than 2% but not enough to prevent further sogginess in, say, retail sales data later this month. In the US as in Europe and Asia, non-manufacturing PMIS are holding up better than manufacturing ones. Japan’s earthquake really did mess up the global supply chain. Fed on hold, ECB prepares to hike.
The US data and the agreement of a new loan package for Greece, have triggered unwinding of bearish Eurozone trades and dollar sales. With little data today beyond Spanish Industrial Production, these trends should continue with moderation. More action should be seen in the volatility space, where volatility will drop. We continue to emphasize normalisation trades in Europe, namely selling USDNOK or EURUSD 3M vols vs. GBPUSD 3M vols.
Another new trend is the extreme sensitivity of the CAD to the current economic slowdown in the US. Canada has a stronger manufacturing link to the US than other commodity currencies, and is more sensitive to oil than other commodities. The pair is now adjusting to a higher trading range with a touch to parity likely. If risk appetite returns, CAD will suffer against SEK, NOK, AUD and NZD. Sell CAD/SEK.
The Greek ‘deal’ will ultimately be a red herring, and the crisis has at least a decade to run. However, it’s good for short-term sentiment. The focus moves on to the ECB meeting on Thursday, which will likely see a strong signal of a July rate hike. The euro’s in thinner air now, but covering of euro shorts on Friday/today does offer an opportunity to short the euro on Scandinavian crosses. SEK remains the currency most supported by prospective rate hikes and we like it vs EUR, and JPY.
Markets Equities: In Asia, the Nikkei closed -1.18% lower as the Hang Seng gained 0%.Earlier, the S&P 500 closed -0.97% lower. The VIX equivalent volatility contract for the S&P500 moved in absolute terms by -0.14.
Energy: Since yesterday 7AM UK Time, Gaz future and Heating Oil moved -0.13% and -0.18% respectively. Gasoline and Crude Oil WTI moved -0.27% and -0.28% respectively.
Currencies: Since yesterday 7AM UK Time, the USD was under pressure against G10. The best performers against the USD were DKK and EUR up 1.2% and 1.15% respectively, while NZD and CAD were the worst performers with 0.06% and -0.3% respectively. In EM/USD, the Hungarian Forint and Romanian Leu were up 1.5% and 1.31%, while the Russian Basket and Chilean Peso were the worst performers ( -0.35% and -0.38%).
Credit: The European Itraxx Cross-over was higher by 4.47 bps. The Sovereign CDS spread between asset rich vs poor Europe was up 0.6 bps. The US Sovereign Risk was down -1.39 bps
Metals: The top performers were Palladium up 2.66% and Silver up 2.35% respectively. The worst performers were Gold and Copper up 0.92% and up 0.18%.
Softs: The largest increases were Coffee and Lean Hog up 3.53% and 0.79% respectively. The worst performers were Cocoa and Corn -0.93% and -1.65% respectively.
Institutional Positioning: EUR positioning quite flat relative to last week suggesting positioning has not yet been built back up again in the short USD trade.
Retail Positioning: Light across the board except long USDJPY see.
Societe Generale
Research & Analytics