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From the Floor: European risk sentiment wilts — #SaxoStrats

   • French-German yield spreads blow out to the widest level since 2002
   • RBA holds rates unchanges at 1.5%, AUD spikes but then flattens
   • Aussie central bank reluctant to talk easing, housing posing stability risk
   • European stocks could see tail risk from French vote in April
   • XAUEUR at three-month high after breaking downtrend from last July
   • HG Copper holding up to USD strength: Hansen

From the Floor
By Michael McKenna

The much-awaited Reserve Bank of Australia meeting overnight saw the central bank hold its main rate steady at 1.5%, with Saxo Bank head of forex strategy John J Hardy stating that the RBA ”is reluctant to talk easing” at present and particularly given the financial stability risks posed by the country’s runaway housing sector, where prices are skyrocketing in Sydney and Melbourne while falling on the country’s western side.

The decision, notes Saxo’s Hong Wei Lee from Singapore, led to a brief spike in AUDUSD (to just shy of the 0.77 handle) while AUDNZD whipsawed throughout the Asian session. According to hardy, both the AUD and the NZD have been on “unsustainable runs higher” of late – a situation that may be coming to an end.

With Asian bourses mixed ahead of China’s FX reserves release, the main story into today’s European session continues to be the blowout of peripheral/core and even French/German bond yield spreads on perceptions of political instability ahead of the French election, where the nationalist Front National leader Marine Le Pen continues to have a real chance of winning and thus diverting Paris to an anti-euro, anti-European stance.

“Looking at the spread between French and German 10-year maturities,” says Hardy, “we see this as having widened to nearly 80 basis points, which is the highest level seen since late 2012”.

Saxo Bank head of fixed income strategy Simon Fasdal says that the significant rally in 10-year German bunds (which rose one full point to 163.43 since yesterday, with the yield consequently sitting at 0.35%), combined with headlines from Greece, risks creating an unstable situation in European bond markets.

Greece remains set to fall short of its bailout budget surplus targets, reigniting “Grexit” fears.

In Saxo Bank head of equity strategy Peter Garnry’s view, the turmoil in fixed income markets and surrounding France’s election could “evolve into a tail risk for European equities into April”.

Elsewhere in stocks, Garnry says that he has concerns regarding the S&P 500 energy sector where he says that current prices reflect an outlook that is far more bullish than current crude prices reflect.

On the calendar, Saxo Bank head of commodity strategy Ole Hansen reports that oil remains rangebound ahead of today’s API US inventories data and tomorrow’s EIA print; also coming up, Hansen notes, is the Opec report on February 13 which will contain key information regarding production and compliance among cartel members in January.

Heading back to Europe, however, Hansen tells us that the emerging soft-euro trend has led to a rally in euro-priced gold, with XAUEUR at a three-month high after breaking the downtrend in place since July 2016.


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Source: Saxo Bank 

“Gold is headed higher on bond and yen strength,” says Hansen, pointing to the significant correlation between JPY and gold and adding that dollar-priced gold now appears to be targeting $1,250/oz.

This is occurring despite a renewal in the dollar’s relative strength, he adds, noting that the same is true in high-grade copper markets where supply disruptions are sending prices higher.

“In HG copper,” says Hansen, “we would look to buy in the low 2.60s and on a break above 2.74 with a stop set below 2.58 on a heightened risk of long liquidation below that point”.

Given that the broad situation animating stock, bond and commodity prices today remains centred on political risks at Europe’s core, further developments in the French election could well shift investor expectations, as could USD reactions to the unconventional and rapid policy moves coming out of Washington.

Today sees the European Central Bank’s Jens Weidmann out speaking at 1635 GMT about the prospects of both the German economy and the Eurozone at large.

Marine Le Pen
The right-wing Front National leader Marine Le Pen's success in the run-up to the French election, as well as her rivals' weakness, has spooked European investors. Photo: Shutterstock

Michael McKenna is an editor at
Market Predator Market Predator
@Hong Wei Lee: next time if possible please speak little bit slowly, audio quality OK. Wish you great day. Regards, MP.


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