13 September 2016 at 11:44 GMT
Fresh data releases from the UK and Germany reveal that Brexit isn't making an impact on the numbers – yet, at any rate. However, Brexit is making itself felt elsewhere and today the German 10-year yield shot up to its highest level since that fateful day in June when Britons voted themselves out of the European Union.
UK headline CPI inflation came out unchanged at 0.6% and below forecasts of 0.7% year-on-year. But the report also indicated growing signs of import inflation on the way due to GBP weakness. An upward rise in the annual rate can be seen in food prices as well as transport. Clothing, restaurants and hotels were notable downwards contributors.
Over on the continent, the German ZEW Current Situation component of the keenly-tracked business sentiment index marginally declined to 55.1 from 57.6. Additionally, ZEW Expectations fell below markets expectations of 2.5% to 0.5% but remain steady on previous reading. The implications of Brexit have not affected the readings – so far at least.
- The calendar is thin today in the US.The monthly budget statement is the only notable release (at 1800). Expected $-107.0bn. Prior $-64.4bn. It's not expected to make a major impact.
GBP is one of the main movers today in a more or less calm FX session. It is depreciating on average -0.4% in the main crosses after slightly weaker than expected inflation data, extending the drop in GBPUSD to -0.6%, to the lows of 1.3255. Tech support around 1.3220 area which roughly corresponds to 38% Fibo level from rally starting August 15. More interesting tech support at 1.3154/60, which is both 50% Fibo from same move and also around 55-day moving average. The USD index showing signs of moderate growth to the 95.30 level. We've seen a correction after yesterday’s selloff on Fed Lael Brainard's comments. EURUSD is trading flat, consolidating in a narrow range between 1.1225 – 1.1245. USDJPY: the Japanese yen is weaker on the day with indices higher in the session. The 102.62 area is the first techical resistance of note. It's difficult to see what can take the pair much higher in an environment that remains risky. USDJPY has found decent support around 101.20/40, so it preferably should not start closing below here as that would start opening up to the 100 level.
FX Options volatilities
Vols opened pretty flat, but as stocks went up from the European opening, vols have been sold off. Selloff was most significant in EMG pairs (vols very bid there yesterday), but also in GBP pairs after the numbers came out without any big moves. Big trade in 1m GBP where 350 mio traded at 8.7. Should EURUSD stay above 1.12 we expect vols to continue to be offered/sideways, but expect buyers of atm and downside to come in if we go below the figure.
Correlations remain upside down as government yields climb in sympathy with the global risk-off sentiment. The German 10-year yield is now firmly back into positive and at its highest level since Brexit. Credit is seeing a tumultuous start to the week as well as XOVER once again faces a rejection from the 300 bps level and has now gained 25 bps since Friday morning in what is also the most dramatic move since the Brexit decision.
European stocks sought firm direction Tuesday. The Dax 30 picked up 0.2% to 10,451 and the CAC 40 was flat at 4,441. In London, the UK’s FTSE 100 slipped 0.1% to 6,694.
Energy shares fell alongside oil prices, while equities struggled to capitalise on Wall Street’s rally after a Federal Reserve official sounded cautious about raising interest rates. Norway’s Statoil lost 2%, Portugal’s Galp Energia moved 1.8% lower and Spain’s Repsol SA gave up 1.6%.
Citigroup said Italian stocks could be worth a buy, based on expectations that prime minister Matteo Renzi would emerge from a forthcoming referendum in a stronger position, provided investors chose carefully. Among Citigroup's favoured Italian stocks were catering company Autogrill and drinks group Campari.
As regards the other movers, Ocado Group stumbled 14% as the online grocery-delivery company posted a rise in third quarter sales but said it’s still seeing margin pressure.
Partners Group Holding AG jumped 10% after the Swiss private markets investment manager posted better-than-expected earnings for its first half.
Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.
As far as the eye can see – low oil prices. Pic: iStock
— Edited by Clare MacCarthy