GBP/EUR 1.1670 (0.8569)
European markets have opened mixed this morning but overall risk is slightly more supported as US markets closed in firmer territory followed by a positive overnight session in Asia. The rationale for positivity in equity markets? Well, Q3 releases have on the whole been firmer (than guided but earnings growth has remained subdued) however the real driver appears to be negative data from the US, concerns surrounding the pace of global growth and expectations super loose monetary policy will remain in place into late Q1 2014.
The major talking points remain focused on the US with the FOMC due to conclude their two day meeting. There are no expectations for any change to be announced tonight but what the market is looking for is an indication towards the timing of a possible exit. As we look at market positioning into the FOMC meeting is suggesting that most do not believe we will see any taper until next year, with markets heavily positioned for this outcome, equity markets around fresh record high based on increased leverage and the USD just coming off recent lows we see volatility risks skewed towards an earlier than expected Taper.
A withdrawal of easing in the US is inevitable, however since September’s taper push back, and the proceeding government shut-down and debt ceiling negotiations, as well as US data generally lower than expectations, the markets have been taking advantage of the Feds continued $85 bln a month in asset purchases. Any indication this will not remain as long as expected could see much of the USD’s weakness since September, as well as equity markets gains reversed in quick fashion. Should the Fed support the markets view there is potential for further gradual gains in US equities, whilst the USD still has room to fall further.
Eurozone data on the whole has been lower than expectations over the last month, in line with concerns that global growth is also slowing. That has not stopped the single currency reaching fresh annual highs against USD. We’ve discussed the single currencies demand as an alternative liquid currency to USD, and while we do not believe the EUR will be replacing the USD as a global reserve currency any time soon, there has been some rebalancing in recent months with US concerns.
Today we have Spanish GDP, German unemployment figures and Eurozone economic confidence data due out also. Spanish GDP came out as expected confirming .1% growth in Q3. German unemployment figures released saw a rise of 2k, with the unemployment rate remaining at 6.9%. This was enough to give the euro a small lift, market was obviously expecting a weaker figure based on the recent poor run of European data. We still await confidence figures but with the US in major focus the possibility of a big reaction or extended follow through is limited.