Dan Larsen
Saxo Bank’s head of FX options Dan Juhl Larsen continues his examination of the model to capture risk premium.
Article / 07 July 2016 at 11:36 GMT

Mid-session Europe: Dovish Fed and Italian bank woes depress activity

Saxo Markets


Foreign exchange

European equities rebound from oversold levels helped by positive US session gains after the Fed minutes signalled that members are less confident in the economy’s ability to withstand an early rates hike.

In data releases so far, German May industrial production came out at -1.3% versus the 0.1% expected advance month-on-month. The print on a yearly basis was -0.4% vs. 1.5% expected.
In the equities world, Danone has agreed to buy US soy milk maker WhiteWave for $10 billion in cash.

Watchlist (GMT)

  • US June ADP employment (+160K exp.) (1215)
  • US initial jobless claims (266K exp.) (1230)
  • Weekly DoE crude oil inventories (1500)

Forex developments

GBPUSD consolidation within 1.2900/1.300 throughout the Asian session continued into Europe until the 1.300 resistance level was taken out as we wrote this report. Large 1.30 strike option expiries were reported earlier by DTC, which should keep the pair around this level for now.  

EURUSD is also in consolidating mode so far today within 1.1050/90 range. Italian/European banks situation still keep traders from taking risk-on for now. US ADP is the main event today ahead of NFP data tomorrow. 

FX Options volatilities
Vols are getting sold again today across the board. 1w rolled to Bank of England, which is the reason it is higher today. Normally a BoE meeting without the inflation report is perceived as a non-event, but this time there is a good chance of a rate cut priced in already and therefore the market willing to buy gamma for that day.  

Fixed income

The classic correlation patterns returns for a while with government bonds in Europe taking a breather and corporate bonds enjoying the improved spirits among investors. Still, close to record levels, the current yield environment is having dramatic impacts on the valuation of most financial assets – which you can read more about in our most recent piece on where you will also find an updated heat map of government bond yields

One of the most damaged sectors is the European banking sector, where Deutsche Bank CDS premiums are now at record highs, surpassing the previous high from the Eurozone debt crisis in 2011, a clear testament to the stress in this part of the market currently.



European shares rebounded from the week's lows on Thursday as oil rallied. Last night’s Fed minutes showed officials were losing confidence in the economy and the pace of interest rate rises in the US was likely to slow which also helped bolster equities. Danone jumped 7% after agreeing to buy WhiteWave Foods for $10bn. Associated British Foods rallied 7.5% after raising its FY profit forecast whilst Marks and Spencer dropped 1.2% after reporting falling clothing sales.
Read more

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.

US:        US Market Wrap: FOMC minutes reveal cautious Fed thinking

Asia:      Morning Report APAC:  UK property hit by Brexit after-effects

Europe: Morning Markets:  GBPUSD anchored below 1.30

Europe: From the Floor: Some relief but Brexit still nags

 The Fed hawks have all flown away. Pic: iStock

— Edited by Clare MacCarthy

The Global sales Trading desk is a multi-asset team providing customised trading solutions


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