Forex Blog

February 3, 2012

Week in FX Jan 29-Feb 3

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 10:35 am

CHF continues to rise despite the EUR’s resilience. The SNB’s pledge to hold the CHF 1.20 cap will soon be tested. Since its inception last September it has worked, however, in the past few weeks’ market sentiment has changed dramatically. China considering greater involvement in EFSF and ESM program has done little to support currency so far.

The market has aggressively been playing the risk reward trade at these levels by selling CHF aggressively and waiting for the imminent announcement. The threat of a deep recession in the problem Euro-zone is only making this trade more difficult to stomach. The region has yet to feel the true impact of the implemented austerity measures to reduce their budget deficits. Euro banks tightening their lending policies to both corporate and private interest over the last three months is putting a tighter noose around mainland Europe. The ECB’s increased liquidity policy is not working.

All of this is pointing towards the Euro sentiment plummeting again-CHF and JPY positive. The Franc’s outright performance against the dollar is not exactly helping the SNB. Bernanke’s dovish tone has driven the yield spreads between the US and Swiss even lower and made the CHF more attractive. It seems that all the cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk, however, the rumored $20+ “yards” of stop-loss orders below the cap figure should be cleaned out if the SNB wants to teach the market an expensive lesson.

Below are some other highlights of the week:


EUROPE

  • EU: The dollar opened the week much stronger against EM and G10 currencies. The risk selloff started during the Asia session, as markets re-opened after the Lunar New Year holiday.
  • EU: Italy issues +€7.5b in 2016-2022 bonds ahead of their largest redemption for 2012 (February 1st +EUR25b). The auctions were well received, however, post interest saw the ECB buying product.
  • EU: Portugeuse 5-year product manages to record the highest yields for the post-Euro era of +22.69%, fueled by the turn of events in Greece. The market perception seems to accept a Greek default as a given.
  • EU Summit: A leaked German proposal for Greece to cede control over its budget in return for financial aid “casted an uncertain outlook on PSI negotiations.” Market continue to question “the soundness of the recent risk rally.”
  • WSJ reported that a Greek PSI deal ‘may’ be concluded this week. This of course is subject to Greece securing a new financing program from the IMF and EU.
  • EU: Mixed European confidence surveys contributed to softening risk appetite at the beginning of the week. Services confidence improved while industrial confidence failed to pick up from the recent lows.
  • EU: Unemployment in the Euro-zone hits a record high +10.4%.
  • EU Leaders: They have agreed to accelerate the set up of a full time +Eur500b rescue fund (EMS and EFSF) and backed a deficit control treaty. Initially response saw European sovereign markets responding well to the summit outcome, with Italian 10-year yields reversing about half of the previous sessions rise.
  • EU: The brief Euro-summit has been viewed as a success relative to modest expectations, allowing the market to eliminate some event risk for the euro system.
  • GRE: Greece PSI remains elusive and is continuing to generate market anxiety.
  • CHF: The SNB’s December balance sheet report confirms that policy makers used FX swaps to add CHF liquidity during the course of December last year (+CHF 20b).
  • CHF: The SNB’s balance sheet also revealed small changes to the FX reserve breakdown by currencies (EUR’s share from +54.8% in Q3 to +52.1% in Q4-in favor of dollars and GBP). At current levels, risk reward favors long EUR/CHF.
  • UK: The market is looking for QE expansion next week in the UK, mostly on the back of money growth remaining very weak. M4 ex-OFC contracted -0.7%, m/m. Net consumer credit declined -£0.4b, while mortgage approvals at 52.9k disappointed vs. the consensus for 54k.
  • NOK: Norway’s credit rose +6.7%, y/y, above the consensus forecast for +6.5%. Retails sales growth remains solid in annual terms at +2.6%, y/y. The futures market expects the Norges bank to remain resilient as data support call for rates “on hold” at the next meeting.
  • NOK: The Norges Bank will purchase foreign exchange equivalent to +NOK350m per day for the Government Pension Fund Global in February. This amount is not large compared to the historical average.
  • EU: Stronger PMI’s in Europe and China allowed risk sensitive deals to pressure the dollar and yen mid-week.
  • EU: The Euro-zone PMI was revised a tad higher from the initial estimate to 48.8. Digging deeper, the German PMI was also revised higher, while the Italian PMI at 46.8 printed well above the consensus forecast of 45.3. Spain’s was not to be left behind, its PMI rose to 45.1 from 43.7. The data suggests that the business climate is at least stabilizing in the region, including in the systemically critical periphery countries.
  • Scandinavia, UK and CE3 PMI’s increased strongly. In the UK perhaps further QE becomes questionable? Swedish and Norwegian prints swung back above 50 (expansion).
  • CHF: In contrast, Swiss PMI decreased sharply to 47.3. They also managed to report a weak retail sale (annual growth rate dropped to +0.6% from +1.8%).
  • EU: Consistent rumors that a Greek PSI deal has been struck (with a 72% NPV haircut) has pushed investors to strap on more risk. What about the collective action clauses?
  • EU: There are reports that the PSI deal is being held up by differences between Germany and the IMF. When the “collective actions clauses” are being enforced we will get to hear more from the disgruntled creditors. The various posturing by interested parties is in danger of making this the worlds longest ‘expected’ announcement.
  • EU: EU Juncker says that Greek PSI talk are ultra-difficult. The lack of tangible progress in the talks seems to be taking a toll on currencies geared to Europe – CE3, Scandis, ZAR, and TRY.
  • CNY: Premier Wen has indicated that China is still researching how to participate in the EFSF and ESM program. China supports European effort to stabilize Euro and it may increase their participation via the rescue funds to help resolve the European debt crisis.
  • CHF: Bernanke’s dovish tone has driven the USD/CHF yield spreads even lower and is making the CHF more attractive. These cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk.
  • EU: Spain and France managed to issue bonds, at the front end and in the belly of the curve, to strong investor demand.
  • GBP: UK construction PMI fell to 51.4 in January from 53.2 (below consensus for 52.5). Manufacturing and services surveys will carry a larger weight for the next BoE meeting (February 9). Analysts are looking for an expansion in the QE program next week based on weak hard data in Q4 and very soft money growth.
  • EU: The Euro area services PMI was revised fractionally lower from the flash estimate, it now reads 50.4 vs. 50.5.
  • EU: Greek PSI talks continue, with markets increasingly ignoring statements suggesting progress is being made. Latest reports indicate a deal could be submitted to the EU and IMF over the weekend, and approved at a Eurogroup meeting next Monday.
  • GBP: The UK Services PMI rose to 56.0 in January from 54.0 in December, the strongest level since March 2011.Next week we get to see if extra QE is to be applied. Unchanged BoE policy or a signal to an end of QE would clearly be positive for GBP as a EUR alternative.
  • EU: Euro-zone retail sales fell for a second month in December, down -0.4% m/m and -1.6% y/y. Retail sales is again strong proof that the EUR’s 17-nations are threatening to return to recession, if they are not already there. In the 27-member European Union, sales rose +0.3%; largely due to a +0.4% rise in the UK and a +0.7% uptick in Poland.

February 1, 2012

Buy the EUR Rumor and Sell that Fact?

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:32 am

The EUR again has failed to break out of its current range. When its on its knees, down and just about out, Chinese PMI lends a hand in the overnight session. The world’s second-biggest economy has withstood weaker exports driven by the Euro periphery debt crisis and a government-induced property slowdown to give a PMI print of 50.5. A print that still is in expansion territory, no matter if the data may be distorted by a weeklong holiday.

Along with a rise in risk appetite influenced by a ‘whisper’ that a Greek debt deal is imminent, has the EUR testing against its upper range. In truth, it’s difficult to find a diehard Bull amongst us. The market psyche has us believing that most EUR positive moves are supposedly an excellent opportunity to add to the record short positions. These EUR short squeezes are to be treated as an opportunity-no action taken and it becomes a cost! The weak bears certainly hope so.

A successful conclusion to the PSI talks as “promised and expected” will not be the end of the matter-negotiations will remain ongoing. Why? The haircuts being discussed (around 70%) naturally will meet “with very unsatisfactory participation from the perspective of Greek and Euro/IMF authorities for forward looking debt sustainability.” Greece is likely to legislate Collective Action Clauses into the outstanding debt. The objective would be, once legislated, they can be used more coercively to force participation in the restructuring process-In English, whatever is agreed upon, there will be more negotiations required. The nightmare does not end with a successful PSI announcement.

Given that there are so many technical details to be worked out, maybe the market is not fully reflecting the difficulties that are likely to be associated with completing the Greek rescue package. For now, data showing that contraction in the Euro-zone factory activity last month (48.8 vs. 46.9) has slowed is supporting the single currency. Germany remains the outlier, the only country registering a reading above 50, indicating expansion. No matter, investors will wait for the promised Greek PSI agreement before outright celebrating. So, is it buy the rumor sell the fact time now?

Forex heatmap

Other Links:
Record Eurozone Unemployment Pits North Against South

Get OANDA’s exclusive weekly Market Pulse FX

Email Address: Preferred Format:

January 20, 2012

EUR Shorts Suffer with Bond Bears

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 11:27 am

US data is beginning to highlight the disconnect between the US and the Euro-zone. As FX traders hone their Fixed Income (FI) skills with the Euro sovereign debt issues, even they must sympathize with the frustration of the US bond bears. The benchmark 10-year Treasury yield has defied improving US data, and straddles the +2% yield for most of this year. It’s another crowded market trade that mirrors the frustrations of the ‘short’ single currency strategy. Euro-zone concern remains in the driver seat while US data for now, acts like “Robin” of the relationship. Yields for Treasuries or other ‘safe haven sovereign debt’ are not in danger of rallying any time soon until the Euro-zone stabilizes.

Below are some other highlights of the week:


AMERICAS

  • US: Martin Luther King Day on Monday was respected by the markets; it was also to be the lead for a quiet beginning of the week, or so we thought. Lack of liquidity led to thin markets, producing volatility that allowed dealers print a new yearly EUR/USD low.
  • CAD: New Motor vehicle sales fell-1% in November to +137.6k units, offsetting the October and September gains. Truck sales fell -1.3% to +80.4k units.
  • USD: January Empire State Index on manufacturing conditions in New York of 13.48 was stronger than the consensus of 11. It was a rise from 8.19 in December and a third straight improvement from a series of negatives.
  • CAD: The BoC, as expected, kept O/N rates on hold at +1%, reporting there is considerable monetary policy stimulus in Canada. Carney sees less slack in an economy that is now expected to return to full capacity by the 3Q in 2013. Inflation was seen as marginally firmer.
  • USD: US wholesale prices fell in December as food and energy costs declined significantly. PPI (manufactures and wholesales) declined a seasonally adjusted -0.1%. A slowdown of costs may give the Fed more wriggle room. Core-PPI increased by +0.3% (the largest increase in seven-months).
  • USD: November TIC report recorded a net rise of $59.8B. Foreign holdings saw a large rise from Japan $59.9b and a small decline from china -$1.5B.
  • USD: December Capacity Utilization increased +0.3pt at 78.1%.
  • CAD: BoC Monetary Report. There was a major shift in tone in the US outlook that sees US growth forecast improve to +2% in 2012 from +1.7% in the previous MPR. The other main take away is a downgraded Europe forecast with growth now to be in recession territory at -1% in 2012 from +0.2% in the previous report.
  • BRL: The Brazilian Central Bank (BCB) cut the Selic rate by -50bp to +10.50%. “A moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012″. BCB seems to be signposting further cut rates. Analysts are expecting another -100bsp by March.
  • CAD: Canadian Manufacturing shipments advanced at a faster pace in November than forecasted, up +2% to $49.1b. Robust gains were seen in the petroleum and coal industry.
  • USD: US December CPI ex-food and energy at +0.1% was unchanged.
  • USD: December Housing starts were weaker than expected with a -4.1% fall to +657k, while building permits at +679k were down a marginal -0.1%. Starts declines were due to a correction lower in multiples.
  • USD: Weekly initial claims plummeted -50k to +352k, while continuing sank to +3.4m. US data is beginning to highlight the discount between the US and the Euro-zone.
  • USD: The Philly Fed disappointed with a 7.3 print (10.3). However, there were pockets of strength, business conditions were up, and employment was moderately higher while new orders and prices paid dropped.
  • CAD: Consumer prices declined in December at the fastest in six-months. On a monthly basis, both the CPI and the core fell in the month, -0.6% and -0.5% respectively. For 2011, Canada’s average inflation rate hit +2.9% (the biggest increase in eight years, 2010 was +1.8%).
  • CAD: Wholesale trade recorded a surprise drop in November (-0.4% to +$48.4b). The market had been expecting a+0.5% gain.
  • USD: Existing home sales came in a little lower than expected. Sales rose +5% in December to annualized pace of + 4.61 m units. Housing inventory fell to a 6.2 months supply.

China Feels the EURO Heat

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 11:27 am

Can we shout “soft landing” loud enough? That is what Europe et al. are praying for from the “Red Rocket,” China. As their economy slows and key export partners struggle more than ever, the government must ensure a soft landing. The call must be fiscal stimulus driven with one priority, improve domestic consumption.

Policy makers seem to agree and are determined to push ahead with shifting the country’s growth drivers away from exports and towards personal spending. The PBoC continues to gradually ease policy. The market should not expect to see a repeat of 2008 when authorities pumped the equivalent of $630b to shield their “empire” from recession. This time around they are expected to be target selective.

Below are some other highlights of the week:


ASIA

  • EUR: The single currency is beginning to lose support from foreign Cbanks. Reserve data for the 4Q in 2011 reveals a weakening in reserve accumulation as compared to previous years. The ‘build (buy EUR’s) to hold down local currencies was nearly “zero”-resulting in a change of global asset prices.
  • CNY: China reported 4Q GDP growth of +8.9%, y/y, higher than the consensus forecast of +8.7%. For full year 2011, year-over-year, growth was +9.2%, down slightly from the +10.4% growth in 2010, supported by robust December macro-data. Retail sales growth rose to +18.1% in December, up from +17.3% in the prior month.
  • JPY: Japan’s Finance Minister Azumi indicated that the BoJ is monitoring the EURJPY rate as it continues to print record lows.
  • IDR: Bank of Indonesia widened the lower end of their inter-bank rate to +200bps, that is similar to a -50bps cut. With BI continuing to ease monetary conditions and the current account now balanced leaves the IDR more vulnerable to capital flow weakness.
  • CNY: There have been reports from China indicate the RRR for banks in Guizhou has been lowered. It seems that authorities want to continue to ease selectively following the robust 4Q data.
  • MYR: Malaysia’s inflation fell to +3.0%, y/y, in December from +3.3%. Analysts note that robust domestic demand points to Bank Negara Malaysia keeping policy rates on hold.
  • IDR: Indonesia’s credit rating was raised by Moody’s to investment grade at Baa3. Along with Fitch’s support, this can potentially increase portfolio inflows going forward, a positive for the IDR in the medium term.
  • AUD&NZD: Poor Aussie employment data (-29.3k in December, below consensus for a +10k gain) is supporting expectations of a further RBA cut (-25bps in February) and a weaker than expected CPI by the Kiwis (+1.8%, y/y, versus the +2.6% forecasted and down sharply from +4.6% in Q3) has put the antipodean currencies on the back foot medium term.
  • PHP: Bangko Sentral ng Pilipinas cut policy rates -25bp to +4.25% as expected. Easing inflation has allowed the Cbank to commence easing to support growth. Ample liquidity allows the easing to have a minimal impact on the currency.
  • CNY: China’s 2011 fiscal revenue rose +24.8%, while fiscal spending only rose +21.2%. The HSBC flash Chinese PMI was roughly flat in January at 48.8. The market believes the results to have been biased by the by the Lunar New Year.
  • THB: Thailand’s export growth was better than expected at -2%, y/y in December vs. -10% expected. Import growth surged to +19.1%, y/y, from -2.1% in November. The trade deficit widened to a record high of +$2.1b. The market expects the floods to continue put pressure on the trade balance. This will obviously affect the THB

January 17, 2012

Falling Consumer Prices Lifts Euro Rate Cut Speculation

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 7:21 am

A greater-than-expected decline in consumer prices in the Eurozone for the month of December has given rise to an increase in speculation for further interest rate cuts. Inflation in the 17 countries sharing the euro was 2.7 percent in December on an annual basis, revised down from an earlier estimate of 2.8 percent for the month, the European Union’s statistics office Eurostat said.

“The pressure is abating although the risks from energy are still there,” said Fabio Fois, an economist at Barclay’s Capital. “We think the ECB could bring rates as low as 0.5 percent in March,” he said.

Source: Reuters

January 11, 2012

Fitch Warns of “Cataclysmic” Euro Collapse

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 7:43 am

Fitch Ratings said today that the European Central Bank must increase its debt buying to support Italy and prevent a “cataclysmic” collapse of the euro. Speaking at an investors event, David Riley, the head of sovereign ratings for Fitch, said the collapse of Italy would almost assuredly mean the end of the Eurozone.

“It is hard to believe the euro will survive if Italy does not make it through,” Riley said, adding that while many saw Italy as too politically and economically important to be allowed to fail, “one might also argue that it is too big to rescue.”

Source: Reuters

January 10, 2012

Bunds and Treasury Yields Narrow

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 11:46 am

Despite the increase of product, US Treasury yields continue to fluctuate ahead of this week’s three US issues totaling $66b. German Bunds on the other hand are definitely trading under pressure, falling for the first time in four days, ahead of the Merkel and Christian Lagarde meet later this evening. The market seems somewhat optimistic that both leaders are “taking steps to resolve the region’s debt crisis.” Chancellor Merkel has indicated that the euro-zone is considering accelerating capital contributions to the region’s bailout fund (EFSF). French bonds have gotten the thumbs up after Fitch said the country will probably retain its AAA credit grade for this year.

Across the Atlantic, dealers have the privilege of taking down three auctions totaling +$66b this week, beginning with today’s three-year +$32b. Even with yields closer to their record lows, volatility in the asset class has dropped to its lowest level in almost seven-months because of the reduced participation rate as investors head to the sidelines. Big picture, the euro-region crisis remains at the forefront of the mind of many investors, and it is this that remains supportive for Treasuries at current key yield levels. The attractiveness of domestic debt affirms the “breakdown in the statistical relationship with economic data”. Stronger North American data seems to be providing investors better yield opportunities to add to their asset mix. The market remains skeptical about the “sustainability of the Euro recovery short term.”

Treasury prices turned a tad higher despite the +$32b three-year supply hitting the market. Some Fed officials remain open to the idea of further easing action. Both Fed members Williams and Pianalto remain “open to the efforts”. The US Treasury Department sold the 3-year notes at a yield of +0.37% to above average demand. The bid-to-cover was 3.73 versus a four auction average of 3.37. Indirect bidders (foreign central banks) took down +39% of the sale versus an average of +37.8%. Direct bidders took +5.3% vs. +11.3% in past sales.

The Nikkei closed at 8,422 up +61. The DAX index in Europe was at 6,162 up +145; the FTSE (UK) closed at 5,696 up +84. US indices remained in positive territory with the Dow currently trading at 12,454 up +61.

    Forex Market Outlook 1/10/12

    Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 6:47 am

    Traders will have a hard time trying to find a down market today with the exception of JPY and USD as the market has taken a decidedly pro-risk tone this morning, which is a welcome relief to some.  Both global stocks and commodities are trading much higher to start the US session.  There are a few different factors driving this sentiment and it is this confluence that is driving markets higher.

    So what’s going on this morning?  For starters, the market is regaining confidence in the Euro zone and the ability of its leaders to tackle the debt crisis.  2012 is likely going to be a different year for EU leaders who appear to be out in front of the crisis unlike last year when they dragged their feet and let the politics play out in public forums which erased any credibility they had maintained up to that point.  Yesterday’s meeting between Sarkozy and Merkel was viewed as positive and the news that they may accelerate payments to the bailout fund is welcome.

    Today Merkel is meeting with Lagarde of the IMF and there is renewed hope that they will further the mission of tackling the debt crisis.  So far they are winning the PR battle and have kept the bond vigilantes away for now, though there is a lot of bond issuances due out over the course of the next month so they are not out of the woods just yet.  But yields are coming down for EU debt, though Italy’s 10-year is still above 7% which is problematic.  Another good piece of news is that Fitch stated they would not downgrade France so long as the debt crisis doesn’t worsen.

    However, news about the current Greek debt crisis has been met with mixed reviews.  It now looks like bondholders may have to take a haircut of greater than 50% which could bring some noise to the markets as investors balk and would prefer default in order to be paid out on their CDS. This will be the story to watch going forward, as well as if this has any impact on future investment in other sovereign debt issues.

    News out of the Euro zone showed that French Industrial Production figures came in better than expected showing positive gains vs. expected declines across the board.

    In the UK, home prices fell less than expected and the market is looking forward to Thursday’s rate decision where the BOE is still expected to make no change.

    Today is a slow day for economic data but one of the big drivers of the markets will be US corporate stock earnings.  Last night earnings season kicked often with Alcoa (AA) posting better than expected results and a host of other equities look to beat expectations despite slowing profit growth.  The correlative effect of higher stock prices still holds some weight and is a major driver of risk sentiment.

    Another driver of risk sentiment is oil prices, rightly or wrongly.  I have always contended that higher oil prices should be bad for risk sentiment and not contributing to risk appetite but I am just one voice out of many.   Oil has been higher this morning to $103, mainly because of Iran’s sabre-rattling, which is threatening the supply of oil to the global market.

    Overnight, China reported a much better than expected trade surplus as reduced imports pushed the balance higher as exports remained steady.  The trade surplus of nearly 16B was almost twice what was expected so China needs to step up their importing if they don’t want to continue to draw ire over their currency peg.

    There is no news of any significance due out in the US today but there is some Fed speak later today that could have a market impact, though unlikely.  In today’s Twitter age, the Fed folks have really learned not to speak out of school and their remarks are carefully vetted ahead of time.  So they will stick to the party line and will go un-noticed.

    If things continue on this trajectory, then we could see further risk appetite if corporate earnings continue to be positive.  The private sector appears to be in good shape at this point but government health is likely to be the topic going forward.  2012 is an election year so expect the powers that be to try to pull out all of the stops to juice the numbers to make it seem like they have been doing a good job.

    Despite our ability to persevere, I can tell you that things could be a whole lot better.  Don’t fall for the counter-factual argument that things could be worse, because the opposite also holds true, that things could be better.  If business gains confidence from the government, not from the economic results, then we could be on the path to recovery.

    January 9, 2012

    Swiss Franc (CHF) Volatile On SNB Resignation!

    Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 9:05 am

    Wow this one happened quickly and I guess where there is smoke, there is fire.  As I wrote in ttoday’s top story, there could be see some changes at the SNB because of currency trades made by the Central bank chief’s wife.  Within 30 minutes of writing that, it was reported that Philipp Hildebrand announced his resignation from leading the Central bank.

    This is a potential blow to the Central bank as Hildebrand was respected and he is credited wioth being the architect of the Swiss franc (CHF) peg to the Euro above 1.20.  What is interesting about this is that unlike other Central bank interventions, this one appeared to have been working.

    Will the markets test the new chief and the and attempt to buy Francs as there is a growing need for safe havens in the Euro zone.  Stay tuned!

    January 3, 2012

    Forex Market Outlook 1/3/12

    Filed under: Forex News — Tags: , , , , , , , , , — admin @ 6:08 am

    Buy Buy Buy!  At least that’s how the New Year is starting out, as the markets are decidedly risk-taking mode after the shortened holiday trading sessions.  Global financial markets are set to open higher, led by stocks and commodities.  The fact that markets couldn’t rally higher to end the year may bode well for the start of 2012, but will it continue throughout the year?

    The short answer is not likely, but I will say that economic conditions appear to be improving albeit slowly and there is still great global risk emanating from the Euro debt crisis.  There is also bound to be further political unrest around the globe, and already it has started with Iran who had new economic sanctions imposed upon them by the US over the weekend.  This has caused them to increase their threats of shutting down the Straits of Hormuz, which is a major conduit for global oil supplies.  This has caused oil prices to shoot up here in the US and it is now trading close to $101.50.  Should this situation continue to escalate, we could see much higher oil prices which could have a major affect on inflation.

    However the markets are reacting more favorably to positive economic data that has been released so far this morning and looking forward to data here in the US late this morning.

    Here’s what we have so far.  Chinese Non-Manufacturing PMI data came in much better than expected, posting a gain of 56 vs. last month’s 49.7.  Recall that anything over ‘50’ means expansion, below means contraction so this was seen as a big plus for the Chinese economy.  This has helped push the Aussie and the Kiwi higher to 3-week highs and the Aussie also was buoyed by its own manufacturing data that also showed expansion vs. last month’s contraction.

    This kicked off risk appetite that then followed through to the European session as Germany reported a much better than expected employment report.  Unemployment fell by 22K vs. an expectation of 10K and the unemployment rate fell to 6.8% from 6.9%.  This is also a positive as the Euro zone needs Germany to continue to thrive in light of the other issues surrounding the region.  The debt crisis is going to continue to be the major headwind in the market and I would not be surprised if the Euro zone looked different by the end of the year.  Whether or not Greece will leave the economic union will be a major question that will likely need to be answered some time soon.

    But for now the markets are content to push higher and meeting between Sarkozy and Merkel next week may provide more clarity on what the expectations are for members going forward.

    In the UK, PMI figures came in better than expected at 49.6 vs. an expectation of 47.3, but they were not able to eclipse the magic ‘50’ number to show expansion.  This was however seen as a major positive and both the Pound and UK stocks have traded higher.

    Later this morning we are expecting the US ISM manufacturing figures, which are expected to show expansion in the 53-range.  The market has high hopes for the US economy as the data appears on the surface to be improving so we may find ourselves in a situation where the market now expects the data to beat the expectation.

    This Friday will also bring the Non-Farm Payrolls (NFP) report which will show how many jobs the US economy has added.  Right now the expectation is for 150K, but my guess is that the market may be expecting closer to 200K as we near the end of the week.

    One of the “problems” however with the data we are seeing now has a lot to do with holidays and the change of the fiscal year.  This can cause outliers and exaggerated figures, which may not be indicative of the “real” health of the economy.  For example, sometimes seasonal hiring and reclassifications can show distorted NFP figures in January so some economists don’t put much emphasis on them.  That’s not to say that the markets won’t though as we almost always get major volatility from Friday’s release.

    There is also a thought that the better than expected manufacturing numbers we are seeing could be a function of companies replenishing inventories as they get rid of last year’s merchandise to make room for the new.  With the better than expected shopping figures from the holiday’s last month, I will be keeping an eye on retail sales figures to start the year to see if the consumer is suffering from exhaustion.

    So essentially not much has changed from the end of last year, though with the start of this New Year there is seemingly a sense of optimism that things can get better.  Last year was interesting to note that US stocks finished the year flat, yet the Japanese yen was the best performing currency. The latter would normally suggest risk aversion so it’s a credit to US stocks that they were able to hold levels.  In other words, stocks could have been much higher without the Euro debt crisis keeping risk at a premium.

    There is much to be excited about for 2012 and today’s action is a god start.  But let’s not get ahead of ourselves just yet, as this could be a long year.

    Older Posts »

    Powered by Efacilitators Hosting