Article / 15 November 2011 at 14:18 GMT

Risk glass half full or half empty?

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank
Denmark
EU sovereign debt spreads widened once again today, herding the bulls toward the exits. But then we saw yet another batch of positive US data. Is the risk glass half full or half empty here?

Euro Debt Woes
Another day with Euro sovereign debt woes in the spotlight today as Italy’s new PM Monti faced political difficulties over the formation of his cabinet and Spain was unable to auction off as many 12- and 18-month bills as it hoped to, coming up a few hundred million short of the full target. Most EU debt spreads rushed to new wides versus Germany as the sovereign debt crisis continues to burn. Italian 10-years also traded above 7.0% again at one point after the yield had dipped to as low as 6.35% yesterday. 

Yesterday, I tweeted (follow me on Twitter @johnjhardy) a link to an interesting update from John Hussman discussing three possible scenarios for the EU from here – from a new European Federal System (highly unlikely, as it would see surrender of fiscal sovereignty) to two scenarios by which either the weak countries launch national currencies alongside the Euro or Germany does so first. Highly recommended reading and goes to show that an “EU breakup” is not necessarily a black and white thing, but could be a long and intricate process.

Odds and ends
The German ZEW survey notched another brutally ugly reading in November, pushing to its lowest level (-55.2) since late 2008. This survey of economic growth expectations was fairly prescient the last time around in predicting a weak period for the German economy and despite Germany’s impressive 2.5% YoY GDP reading for Q3, some of the more leading data suggests a rather drastic deceleration is now taking place in Q4. 

The UK CPI was released today without much fanfare, coming in slightly below expectations on the headline, though slightly above on the core at 3.4%. That’s a rather high number and not at all GBP bullish, considering the negative interest implications when overnight rates are at 0.50% and with the assumption that the BoE will look through almost any inflation level for now. Sterling is its usual “inbetween” self when the Euro is suffering – stronger than the single currency but far weaker than the USD or JPY. The 0.8500 level in EURGBP is an important support level, with interesting implications if it is taken out.

The pattern for the JPY remains similar to previous market cycles, as the currency, the MoF/BoJ efforts notwithstanding, simply can’t avoid strengthening in distinctly risk off markets. USDJPY is back testing below 77.00 as of this writing after a spike in the Asian session and the likes of NZDJPY and CADJPY are getting fairly hammered in the last couple of days. Tonight will be the second day of the Bank of Japan meeting. The market doesn’t seem to respond to BoJ easing, only MoF helicopter drops of JPY, but stay tuned on that front as the sub-77 zone likely doesn’t sit well with the government. 

Yesterday, I wrote a bit about the FOMC’s Evans and his support of further stimulus and even the use of the nuclear option of NGDP targeting. He was out speaking again today in what appears to be a relatively repeat of other recent speeches (in favor of more stimulus in an effort to bring down unemployment, even if it means uncomfortably high inflation for a time). The contents of the speech were perhaps less interesting than the comment that his views on stimulus were “unusual” on the FOMC. This didn’t get any market reaction, but it’s interesting as it suggests perhaps that the Fed is farther away from a more aggressive stance than is currently imagined.

Another batch of positive US data today, with Retail Sales ex Gas and Autos handily beating expectations with a +0.7% MoM surge. The Empire Manufacturing data, the most consistently weak of regional manufacturing surveys, meanwhile, notched a marginally positive +0.61 vs. the -2.0 expected. The core PPI, while notching a 0.0% reading for the month-on-month figure, saw the core surging +2.8% year-on-year, the most in two years.

Chart: USDCAD
USDCAD surged higher toward the top of the range today before turning tail back into the range on a surge in risk appetite from positive US data and on a positive Canadian manufacturing sales data ahead of the US equity market open. Will the range hold once again as it did on the last two attempts through the 1.0225 area, or is the greenback ready to take on all comers again? Note the support from the 55-day moving average (red line).


Looking ahead
It’s tough to have any faith in directional moves these days, as we discussed yesterday, though we have seen reasonable follow up from yesterday’s pattern reversal formations. Still, a look at a basic risk barometer like the US S&P500 shows a vicious series of zigs and zags in a contracting range and that range needs to be abandoned for a larger move to develop here. In the USD- and JPY- crosses, the ranges are giving way in places, with the key pair EURUSD yet to break out to new lows after last week’s treacherous false break lower. Stay tuned.

Most interesting development of the day – a Bloomberg poll of Iowans likely to attend the Iowa caucuses showed four Republican contenders in a dead heat. It is very interesting that Ron Paul appears as the second most popular on that list of candidates, since the entire world would be a different place indeed were he to win the presidency, while the difference between a President Romney and a President Obama would be virtually indistinguishable.


Economic Data Highlights 
  • Germany Q3 GDP out at +0.5% QoQ and +2.5% YoY vs. +0.5%/+2.4% expected, respectively and vs. +0.3% QoQ in Q2.
  • Norway Oct. Trade Balance out at 26.7B vs. 34.1B in Sep.
  • UK Oct. CPI out at +0.1% MoM and +5.0% YoY vs. +0.2%/+5.1% expected, respectively and vs. +5.2% YoY in Sep.
  • UK Oct. Core CPI out at +3.4% YoY vs. +3.2% expected and +3.3% in Sep.
  • UK Oct. RPI out at 0.0% MoM and +5.4% YoY vs. +0.1%/+5.5% expected, respectively and vs. +5.6% YoY in Sep.
  • Euro Zone Q3 GDP out at +0.2% QoQ and +1.4% YoY as expected and vs. +0.2% QoQ in Q2
  • Germany Nov. ZEW Survey out at -55.2 vs. -52.5 expected and vs. -48.3 in Oct.
  • Euro Zone Nov. ZEW Survey out at -59.1 vs. -55.3 expected and vs. -51.2 in Oct.
  • EuroZone Sep. Trade Balance out at +2.1B vs. -1.5B expected and vs. -1.2B in Aug.
  • Canada Sep. Manufacturing Sales out at +2.6% MoM vs. +1.3% expected
  • US Oct. PPI out at -0.3% MoM and +5.9% YoY vs. -0.1%/+6.3% expected, respectively and vs. +6.9% YoY in Sep.
  • US Oct. PPI ex Food and Energy out at 0.0% MoM and +2.8% YoY vs. +0.1%/+2.8% expected, respectively and vs. +2.5% YoY in Sep.
  • US Oct. Advance Retail Sales out at +0.6% MoM and +0.7% ex Auto and Gas vs. +0.3%/+0.2% expected, respectively
  • US Nov. Empire Manufacturing out at +0.61 vs. -2.0 expected and -8.5 in Oct.

Upcoming Economic Calendar Highlights (all times GMT)
  • US Sep. Business Inventories (1500)
  • US Fed’s Williams to Speak (1505)
  • US Fed’s Fisher to Speak (1730)
  • US Weekly API Crude Oil and Product Inventories (2130)

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