Market remain jittery as Euro-zone concerns mount
O/N BULLETS
- Spanish governing socialists suffer heavy losses in local elections
- IMM data show further reduction in USD shorts, but positions still substantial.
- Pressure for Greek measures intensifies as current tranche of loan will only last 2 more months
USD
The sharp risk sell off last Friday was typical of a Friday, at least of late, but there may not be enough news today to trigger a significant turn in sentiment. There hasn't been much real news over the weekend, but there has been nothing positive, so an attempt to breach the 1.40 level in EUR/USD seems likely initially. 76.50 in the USD index remains a significant level on the upside which is a little further away.
EUR
Spanish elections produced the expected losses for the Socialist government, but it seems unlikely in our view that it will result in the feared cascade of negative budget news form the regions that the market was talking about on Friday. The budgets have been under very close scrutiny in recent months, and it seems unlikely that such information would have escaped government probes. Nevertheless, there is clearly little confidence in the EUR, and some clearly positive news from Greece on privatisation or budget measures seems necessary to prevent general EUR weakness. The Euro-zone PMI data could be of significance, and the risks are on the downside given the expected Q2 slowdown.
GBP
Sterling once again showed its safe haven status on Friday, and given the lack of news on the calendar today, is likely to remain largely a function of market risk appetite. 1.6120 remains very good support in GBP/USD, which may nevertheless be challenged if there is major weakness in risk, though the fact that the IMM showed GBP positions effectively square as of last Tuesday suggests limited downside at this stage. Last week's low at 0.8673 in EUR/GBP is already being tested and 0.8625 looks likely to be tested later today if we see weaker Euro-zone PMI data, but this is a level that we would expect to hold near term.
NOK, SEK
After a period in which they both suffered from 'risk off', even against the EUR, the NOK and SEK have gained against the EUR in the last few sessions and gave relatively little back on Friday in spite of risk weakness. These are both at attractive levels against a range of currencies, but look notable good longer term value against the CHF, JPY and AUD. Nevertheless, they will struggle to keep pace with safe haven currencies if equities remain weak.
Spotlight – Risk decline nearing a low? – The sharp risk sell off on Friday obviously underlines that the market remains very jittery, but there is some evidence of bottoming out in the general risk sell off seen in the last few weeks. The correlation of yield with currency movements is itself well correlated with turning points in equities and other risk measures, and the recovery and reversal in risk appetite last week is similar to the market behaviour in November last year. However, in general turns in the correlation with yield, as were seen last week, are a signal for a more persistent improvement in risk appetite, and at least suggest that we are nearer to the end than the beginning of the recent risk sell off.
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