GBP/EUR 1.2507 (0.7994)
There were shouts across trading floors of “black Wednesday” before US markets even opened yesterday and the huge sell off in equities across the globe signalled risk aversion has firmly taken hold. A bad run of data releases from Europe and the US, as well as concerns on Ebola, Syria and global growth have all been attributed to the sell off. In Europe the CAC was down 3.6%, the DAX down 2.9% with the FTSE down over 2.8%. The outlook in the US was not much better with the S&P down .8%, trimming an earlier decline of close to 3%. The “Black Wednesday” cries may have been premature but they certainly highlighted the level of fear currently residing in markets as growth and inflation (or lack of) concerns grip major economies. Safe haven assets have been rallying with gold trading to a fresh one month high, while the JPY was top of the list for safe haven currency demand, bond markets also showed signs of the rush to safety as the US 10 year note yield dropped to below 2% momentarily, before steadying out overnight at 2.07%. The USD index slipped lower, posting its biggest one day loss in a year, the USD is now facing its second straight week of declines after markets pulled back rate hike expectations from the Fed. Markets have started today a little firmer, but it looks more like an early correction to yesterday’s heavy losses.
One of the bigger catalysts for yesterday’s sell off came before US markets opened with a number of US data releases disappointing. Fed funds rates had been pricing in a 53% chance of a rate hike by Mid 2015, this dropped significantly to 14% following a larger than expected decline in US retail sales (down .3% vs .1%) and a massive deterioration in the Empire manufacturing figures for October (posting 6.17 vs 20.25) . These weak figures saw traders rush to bond markets, which then resulted in a full rout to risk aversion. There was a momentary intraday spike as someone thought buying the dip lower was an idea but this quickly reversed itself once again for markets to close in the red. The USD will now be tied to global data releases more than usual, the greenback suffering from contagion concerns as the global economy slows. The USD did outperform in overnight trading, clawing back some of the losses yesterday with notable gains against the AUD.
Today’s calendar from the US has plenty of data to raise concern, especially if it under performs. Industrial and manufacturing production data cross the wires, with Philly Fed activity index due later in the session. There will also be several Fed speakers in the spotlight today with comments from the Philly Fed and Minneapolis Fed Presidents, both are voting members of the FOMC so their comments will carry significant weight, especially if they highlight recent concerns. There will also be comments from the Atlanta and St.Louis Fed president as well so we will be watching headlines closely.
The EUR has found itself with surprising strength but huge concerns remain. The recent rally in EURUSD and EURGBP has been on slower data from the US and UK respectively, also helped by a small relief rally in the single currency whose decline had reached oversold levels. We warned yesterday that Europe remains vulnerable to outflows of funds and yesterday proved how tentative markets are, Portuguese and Greek markets were down close to 7% on the day and their declines have continued this morning, the outflow of funds thus far appear to have gone into Eurozone bonds with the benchmark German bund yield falling to fresh 12 mth lows. Should these funds look to leave the Eurozone the single currency could find itself facing a bottomless hole.
The Euro paid little heed to yesterday’s confirmation of weak German CPI, this morning focus will be on the regional print for the Eurozone which is due to confirm inflation at .7% year on year. With the USD facing some selling pressure and rate hike expectations diminish and the EUR still somewhat resilient to bad news with so much already priced in, EURUSD still has the potential to rally further. We did see a spike yesterday just short of 1.2900, a break of 1.2880 area will likely open up a move higher towards the 1.3000 level but we still expect the dominant downtrend to continue over the coming months.