Article / 21 February 2017 at 13:02 GMT

Mid-session Europe: Equities gain on forecast-beating Eurozone PMI

Saxo Markets


Foreign exchange
European stock markets gained on forecast-beating Eurozone PMI data on Tuesday, suggesting that European economies are holding up despite the political turmoil that has roiled markets this year.

The Eurozone manufacturing PMI rose to 55.5 from 55.2, beating economists' average expectation of a dip to 54.9.
The US dollar is finding further strength on Philadelphia Fed president Patrick Harker's remarks that a March rate hike is still on the table .

EUR volatility is on the bid .

Precious metals are again being tested and looking for support.

Shares in banking group HSBC shares slid 6.5% after the company reported a fourth-quarter net loss of $4.23 billion .

  • - US flash services PMI (1445 GMT)  

Forex developments

Philadelphia Fed president Patrick Harker's hawkish comments put the focus on a March rate hike, and EURUSD has dropped during the European session to an interesting Fibonacci level. That is the 1.0528 area, which is the 61% Fibo level from the January rally to the highs of February. The level was tested but rejected on February 15, so it is important to see if the pair closes the day below, which would open the way to the sub-1.0500 area. On the top side, 1.0585 is the 50% Fibo level from the same move. The euro weakness comes despite decent PMI figures from the Eurozone.

GBPUSD seesaws from yesterday and moves lower with the stronger USD. The main technical support is the 100-day moving average at 1.2405 today. As mentioned yesterday, this moving average has been decent and has held since January 23; cable has not closed below that level since then, so we are again watching how it closes on the day. Tomorrow brings important GDP figures from the UK. Retail sales in the UK were weak last week, and lower GDP tomorrow could be the push needed. The magnate on the top side remains the 1.2480 area, so closing below the 100-day moving average could remove the focus from that. EURGBP is weaker and visiting the 200-day moving average at 0.8464. The last time this moving average was broken back in December 2015, it changed the fortunes of EURGBP, so we're also keeping an eye on this level.

USDJPY is on the bid following Fed comments lately. It was contained below the technical resistance we mentioned yesterday at 113.25, and a break of that today in the Asian session was the trigger needed for a higher USDJPY. It's hard to see what could increase upward momentum other than very strong PMI figures from the US today, which would be needed to further bolster chances of a March hike. The 114.28 area is the Fibo level from the drop from the start of January highs to lows of early February .

FX Options volatilities
EUR vols have been super bid this morning, as spot is taking a new leg lower on a day when not much was expected in terms of implied volatilities.
One-week EURUSD closed at 6.4 yesterday, which implied an expected weekly range of 93 USD pips. So a 100 pips move lower in EURUSD just today is a big move and therefore vols are also higher. It feels like the French presidential election is again the key driver for the lower euro. The Germany-France yield spread has widened further today and is still at a 5-year high, with the 10-year spread at 0.78. Betting markets are also indicating a higher probability for a Le Pen victory (29%) in the French presidential race, though Macron is still the favourite.

Three-month EURUSD is now at 10.95, up 0.5 today. Risk reversals are also higher, with the EURUSD 3-month 25d RR from 2.45 to 2.7 favouring euro puts. 

GBP and JPY vols are not doing much.

Fixed income
Commodities table
European markets pushed higher after Eurozone manufacturing and services PMI numbers beat expectations. Energy stocks have been the best performing sector, while financials weigh heavily after poor results from HSBC.

HSBC shares slid 6.5% after the banking group reported a fourth-quarter net loss of $4.23 billion against $1.33 billion a year ago. The results missed estimates as revenue dropped.

Wood Group fell 8% as the oil-services company expressed caution on its 2017 outlook.

Mining giant BHP Billiton carried the mining sector higher as stronger commodity prices and cost-cutting proved fruitful. The company also raised its dividend above expectations.

In the US, Home Depot shares rose in pre-market dealing after the company reported better-than-expected numbers this morning. Meanwhile, we wait for earnings from Wal-Mart and Macy’s. 

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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. 

Asia:      Morning Report APAC: US closed for Presidents' Day; Le Pen gains

Germany's Ruhr
 Industrial heartland, Germany's Ruhr. Tuesday's data include PMIs from France, 
Germany and the Eurozone. Photo: Shutterstock

— Edited by John Acher

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


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