Althea Spinozzi
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Article / 18 July 2014 at 5:58 GMT

3 Numbers: Europe at critical levels, UK lending report, US sentiment

Blogger / MoreLiver's Daily
• EURUSD at ECB's June-meeting lows, bond yields at crisis lows
• Bank of England's quarterly lending report could move GBP
• US consumer sentiment not going anywhere

Today’s data calendar is light, and markets should continue thin, summertime reactions to the Ukrainian crisis, which has escalated after a passenger jet was shot down yesterday, and the weakening economic data, as this chart of Citigroup’s economic surprise indices shows.

The United States and European Union are about to conclude trade talks today, and a press conference is scheduled at 13:30 GMT.

German bond yield at crisis lows, EURUSD tests support

Risk-shunning investors have been moving into bonds, and the German ten-year government bond’s yield fell on Thursday to 1.15 percent, which is also the crisis-low from both 2012 and 2013. A move lower from here would be a stunner, and it would be hard to fit such a development with the pretty picture that the euro crisis is over, the economy will recover and inflation rate is bottoming out.

In contrast, while the US Treasury note’s yield has fallen notably to 2.462 percent, the 2012 low of 1.36 percent is far away. This chart from Thomson Reuters shows the divergence between the bond yields of Germany, the UK and the US.

Europe is particularly exposed to possible additional sanctions against Russia. China’s investment boom is more or less over for the foreseeable future, which hurts even a strong exporter like Germany. All of this is slowly beginning to depress the euro. Investment flows to Europe have run their course, as bond yields have fallen for a couple of years and have little room to provide additional carry trade-profits to investors. Banks have sold off the assets that they wanted to rid themselves of before the comprehensive assessment of their balance sheets by the European Central Bank (ECB). The Federal Reserve is almost finished with tapering its monthly asset purchases, and its first rate hike is seen taking place next year. The only positive things for the EURUSD at the moment are the current account surplus and diversification of reserve currency holdings.

EURUSD is currently testing the 1.3500 low seen around the ECB’s June meeting. Unless buyers rush in soon, the level could be taken out and a quick moved to next round numbers, first 1.3400 and ultimately the November 2013 low of 1.3300 could be next.

Source: Bloomberg, Saxo Bank

While the recent sell-off in equities has been brisk, in percentage-terms the correction is not necessarily over. In most years since the crisis began the European stock market has gone through deep corrections, as the attached chart of the European stock index ETF shows. A visit to 2014 lows would mean a the peak-to-trough move of roughly 13 percent, which would not even turn the bull trend. It looks like the “sell in May”-strategy is vindicated, but could provide an excellent buying opportunity in the coming weeks.
FEZ Drawdowns

Source: Bloomberg, Saxo Bank

This quarterly report from the central bank is usually not a big deal, as most of the numbers have already been inferred from higher-frequency sources. However, as the Bank of England (BoE) ponders the timing of its first rate hike, markets might be more eager than usual to see how the numbers add up in the opinion of the BoE.

The Bank of International Settlements warned two weeks ago that the current low interest rates are dangerous to the world economy, and BoE’s governor Mark Carney countered on July 15 that the BIS is ‘disconnected’ from reality. The lending report could mention some of these threats posed by the nominally ultra-easy monetary policy. The report will be available on BoE’s website.

USA July Thomson Reuters / U. Michigan Survey of Consumers (13:55 GMT)

The consensus expects the mid-month sentiment to increase to 83 from 81.2 in June. The latest batch of bad news is not included in the survey period, and some higher-frequency sentiment indicators have fallen in recent weeks. While the sentiment’s uptrend since 2009 is still in place, the index has not managed to exceed the highs set in late 2012. An improved number could be shrugged off as being ‘late to the party’, while a negative surprise could provide a late-day excuse for some more selling pressure.

US sentiment

— Edited by Clare MacCarthy


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