Risk appetite remains under pressure as headlines from the Middle East, general unease around growth and rising European peripheral yields have kept risk seekers sidelined. This renewed bout of risk aversion comes on the heels of yesterdays sizable sell off, with the S&P dropping -1.25% on the day EURUSD briefly traded through 1.2900, dragging EURJPY to 100.36 low. Gold continues to feel heavy with the precious metal trading lower to $1544.15 down nearly $50 since the start of the week (Shanghai copper is down -2.00% following yesterday's LME losses). Brent crude traded marginally higher to $107.86 as tensions increased. In response to Iran's threat to close the Strait of Hormuz, pentagon spokesman George Little said, "Interference with the transit or passage of vessels through the Strait of Hormuz will not be tolerated." Given the heightened tensions in an issue that could easily spark a military confrontation causing a spike in energy prices and clobber the fragile global economy, the markets seem to be taking the headlines in stride. We are seeing little evidence of event risk positioning. The lack of concern could be driven by the statements of Gulf Arab nations that they are prepared to step in to offset any potential loss of exports from Iran. As with any Geopolitical event, markets will be monitoring the unfolding headlines cautiously.
In Europe, the news wires are reporting that Sarkozy and Merkel might meet on January 9th to discuss the details of a tighter fiscal pact and commitment to the EUR. At this point we have yet to hear of any official confirmation of this meeting. Worryingly, the bond market has resumed their two-tier pricing in the Eurozone. German and French yields are consolidating lower, while peripherals including Italy are trending higher. In today's European session, markets will once again be watching Italy and their next foray into the capital markets. Yesterday Italy saw its short term funding costs chopped in half. The 6-month bills yielded 3.25% which was half of the 6.50% that the yields paid in late November. This was a positive result and the first auction since the ECB liquidity injection. While the result was good, given the short duration, we suspect that the “Sarkozy trade” is having a great influence on their renewed confidence. The Italian 10yr yield initially fell but rose to 6.945% by end of day. Today Italy will be auctioning off €8.5bn 3yr, 9yr & 10yrs. Should the markets feel confident in buying the short end of the curve but steer clear of the longer duration paper, then the European crisis will face a “death from a thousand cuts”. But the end result will be the same
The stark deterioration in Swiss KoF leading economic indicators since May 2011 continued in yesterdays depressing read. The massive unexpected fall to 0.01 vs. 0.23 expected, will have government officials and business leaders alike screaming for a repeg and continued calls for negative interest rates. The press released stated that the new low of 0.01 “suggests Swiss economic growth on a year-on-year perspective is going to stagnate over the first months of 2012.” Within Economic Barometers only the “Construction” module remains in positive territory, although it is clearly “exhibiting an on-going downward momentum.” The recent IMM data shows an interesting pattern that traders should be able to exploit. In the week which encompassed the SNB's decision to not shift the EURCHF “floor”, traders cut their short CHF holding nearly in half (although the overall position was increased by one- third in anticipation only 4 weeks prior). We were surprised by the number of traders unwinding since the general consensus is that the SNB is likely to move their exchange rate policy in Q1 2012. But it just goes to show how influential analyst opinions have become as many were convinced after a particular bulge bracket banks research all but guaranteed the inside line to the SNB thought process and a December repeg. With incoming economic data expectations highly skewed to the downside, we suspect the SNB's verbal intervention will increase significantly. In addition, expectations for inflation have fallen with Switzerland growth prospects which will give the SNB the authority to act under their price stability mandate. The recent EURCHF sell off came short of testing the 1.2150 support and given the SNB still unblemished credibility, we would be watching for traders to reload on EURCHF longs in anticipation of a shift to 1.2500 or potentially 1.300.
By
In Europe, the news wires are reporting that Sarkozy and Merkel might meet on January 9th to discuss the details of a tighter fiscal pact and commitment to the EUR. At this point we have yet to hear of any official confirmation of this meeting. Worryingly, the bond market has resumed their two-tier pricing in the Eurozone. German and French yields are consolidating lower, while peripherals including Italy are trending higher. In today's European session, markets will once again be watching Italy and their next foray into the capital markets. Yesterday Italy saw its short term funding costs chopped in half. The 6-month bills yielded 3.25% which was half of the 6.50% that the yields paid in late November. This was a positive result and the first auction since the ECB liquidity injection. While the result was good, given the short duration, we suspect that the “Sarkozy trade” is having a great influence on their renewed confidence. The Italian 10yr yield initially fell but rose to 6.945% by end of day. Today Italy will be auctioning off €8.5bn 3yr, 9yr & 10yrs. Should the markets feel confident in buying the short end of the curve but steer clear of the longer duration paper, then the European crisis will face a “death from a thousand cuts”. But the end result will be the same
The stark deterioration in Swiss KoF leading economic indicators since May 2011 continued in yesterdays depressing read. The massive unexpected fall to 0.01 vs. 0.23 expected, will have government officials and business leaders alike screaming for a repeg and continued calls for negative interest rates. The press released stated that the new low of 0.01 “suggests Swiss economic growth on a year-on-year perspective is going to stagnate over the first months of 2012.” Within Economic Barometers only the “Construction” module remains in positive territory, although it is clearly “exhibiting an on-going downward momentum.” The recent IMM data shows an interesting pattern that traders should be able to exploit. In the week which encompassed the SNB's decision to not shift the EURCHF “floor”, traders cut their short CHF holding nearly in half (although the overall position was increased by one- third in anticipation only 4 weeks prior). We were surprised by the number of traders unwinding since the general consensus is that the SNB is likely to move their exchange rate policy in Q1 2012. But it just goes to show how influential analyst opinions have become as many were convinced after a particular bulge bracket banks research all but guaranteed the inside line to the SNB thought process and a December repeg. With incoming economic data expectations highly skewed to the downside, we suspect the SNB's verbal intervention will increase significantly. In addition, expectations for inflation have fallen with Switzerland growth prospects which will give the SNB the authority to act under their price stability mandate. The recent EURCHF sell off came short of testing the 1.2150 support and given the SNB still unblemished credibility, we would be watching for traders to reload on EURCHF longs in anticipation of a shift to 1.2500 or potentially 1.300.
By
M.Zohaib Gadit
Forex Trading Consultant
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