No change in themes – still Euro zone worries and global QE speculation on the menu.
Good news was difficult to find across the board for the world’s major economies last week. Spanish bonds closed above 6.2%, Greece still treading water, US manufacturing data disappointing, Chinese FDIs still on the retreat. However, Germany, still being the darling of the Euro zone, posted solid GDP data. Clear communication from the G8 over the weekend, but no real action taken and markets still await confirmation.
Risk was on the retreat once again last week and investors fled to safer havens pushing yields lower in the US and also in Germany. Spanish bond auctions showed that investors demand a higher premium for Spanish assets, hurting the Spanish budgets. Spanish stocks have also retreated more than 7.5% in May and it seems like the old term “sell in May and walk away” so far is holding up. The stock markets have globally lost €4trn this month and on the currency side, we have seen big drops in the AUD, EUR and NZD, whereas the USD and JPY remains the currencies of choice for long positions.
The GBP is a special case at the moment, due to the clear voicing that the UK does not want to play in a role in helping the Euro zone out. The market reaction has been to send EUR/GBP to highest levels since November 2008 and despite some short term relief, we could see the trend continue if the situation in Greece does not improve post the June 17 election. In addition, data from the UK is very significant this week. Tuesday, we have the April inflation data; Wednesday the April retail sales and Thursday the 2nd released of the Q1 GDP figures. Also, the minutes from the BoE will be very interesting for revealing the monetary stance towards rates and monetary stimulus. The markets are expecting a 9-0 vote on interest rates and 8-1 on the size of asset purchases.
EUR/GBP took out the 2010 low at 0.8067 and has made a new 2012 low at 0.7950 last week, but retraced higher post the quarterly inflation report and is currently back above the 0.80-figure. Current support at the 2012 lows and resistance seen at 0.8130/50-zone.
From the US following the huge disappointment in the Philly Fed figure, speculation of quantitative easing has once again been triggered as the strength of the US growth is being questioned. Retail sales were also on the soft side. This week, New Home Sales along with the Durable goods orders will be the key drivers for the Greenback. EUR/USD still struggles in the current environment, but last week’s strong finish could be an indication of a short term relief. The line in the sand for the pair remains at 1.2625, where a close below could give scope for a test of 1.25
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