“The French don’t even have a word for entrepreneur” – George W. Bush
Yesterday’s French Bond auctions (predominantly in the 10 and 30 year maturity), while blamed for the sell-off in the EUR, were in fact not as bad, at least in demand terms as the German auction the previous day (or indeed the failed Bill auction of the embattled Hungary). Timing, however, remains everything.
Back to reality
Whilst many commentators welcomed the New Year by extolling a number of potential virtues of the super easy monetary environment and the prospects for global asset reflation, the last couple of days have underlined the old adage that ‘if there is one thing traders dislike the most, it is uncertainty’. The uncertainty surrounding not only what the plan is for the Eurozone but indeed what the current reality ‘actually’ is remains…uncertain. The EUR remains under pressure and action is required to change it
UK and US outperform
The US data continues to highlight the growing economic differentiation between the US and the Eurozone and indeed within Europe the UK data is also outperforming significantly (service sector survey data hit a 5 month high, consistent with Q4 non retail private service sector growth of 0.4 percent quarter on quarter) and my core view of the back end of 2011 that GBP will outperform EUR remains valid as we start 2012. In part this will continue to be driven by the portfolio diversification out of the Eurozone but in my view as the year progresses the UK will increasingly be seen as being part of the group of countries leading the global economy ‘out’ of recession and not ‘into’ recession as its 2008 nametag read.
Reports from Europe about delays to the release of the EU / IMF aid tranche to Greece of 3 months (too close for comfort to the point at which Greek PM Papademos said Wednesday would induce a default); France’s desire to push ahead unilaterally with a Tobin Tax (also likely to have a greater negative implication for French Financial services than the boost to government finances that is hoped for); And even reports that Germany will not support a higher bailout fund ceiling despite Italian PM Monti calling for it; all add to the woes of the zone.
Falling short?
There were a number of articles and comment in the run up to the end of the year that the speculative or discretionary market was short of EUR at record levels (and hence suggesting that the market was vulnerable to a short squeeze higher). My riposte at the time was that the real market was not at all short of the EUR and that the futures data in this instance is misleading was highlighted to a small degree yesterday as the EUR slid lower on relatively little news. Over the next couple of days I would expect this anomaly to be highlighted further as EUR sell off’s from here will force those waiting on the sidelines into the market.
This afternoon’s US employment report may be just the stimulus needed to do that. Yesterday’s private sector employment report highlighted a sharp rise in employment for the month however the lack of seasonal adjustment to the series may mean that the correlation to today’s payroll data is minimal. I would however still be looking for a higher print than the 150k central market expectation as recent economic data momentum begins to feed through into employment growth. Whilst I would not expect a similar move lower in the unemployment rate of the US, sustaining the 8.6 percent level should be seen as a positive after the sharp fall in November.
The subtle change for 2012 however is likely to be that strong US data will likely now be a positive for the USD as it highlights the 2 speed global economy (and not as it was for much of 2011 a negative for the USD as a function of being positive for risk).
Neil Staines
SAXO BANK