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EUR consolidates gains

MARKET RECAP Jan. 20 2012:

By Saxo Bank

Risk still looking buoyant

THEMES TO WATCH – UPCOMING SESSION

JP All Industry Activity Index (0430)

JP Leading/Coincident Index (0500)

GE PPI (0700)

UK Retail Sales (0930)

CA CPI (1200)

CA Wholesale Sales (1330)

US Existing Home Sales (1500)

Market Comments:

The last trading session before most of Asia disappears for the extended Lunar New Year holidays was a quiet affair though Asian bourses put in a strong showing and risk generally consolidated yesterday’s up-move.

On the data front, we saw the flash estimate of HSBC’s manufacturing PMI for China in January and it showed a barely changed reading from December. Coming in at 48.8, marginally higher than 48.7 last month, the number suggest that the suspicion of front-loading production in December ahead of the Lunar New Year may be unfounded with a stable performance, albeit still below the 50 expansion/contraction threshold.

In other data, Australian export prices pulled back by -1.5 percent in the fourth quarter as commodity prices eased but a slightly lower AUD and higher global energy prices pushed import prices 2.5 percent higher during the quarter. Despite the shift in prices, Australia’s terms of trade remain at impressively strong levels after a near-term peak last April (corresponding nicely with the near-term peak in the AUD).

The prospect that a deal on Greek private sector involvement (PSI) is getting closer, strong auctions by France and Spain (courtesy of ECB liquidity provision, no doubt) and strong jobless claims data out of the US all combined to give risk another leg up overnight and saw the EUR breaking through the 1.29 level versus the dollar for the first time in two weeks. One has to wonder at what level a EURUSD would trigger weak EUR shorts (still at record levels) to bail out – above 1.30?

Spain sold well over its target (EUR 6.6 billion vs. target of EUR 4.5 billion) in maturities from 4 to 10 years while France sold just short of its target, but unloaded a total of nearly EUR 8 billion. The markets barely glanced at leaked drafts of the new EU treaty (which showed a combined EFSF/ESM fund with a minimum of ˆ500 bln firepower) and more comments from ECB’s Weidmann about his opposition to further ECB bond buying together with warnings from Fitch that revisions of six Eurozone countries are likely failed to dampen the positive risk sentiment.

On the US data front, weekly jobless claims reversed al last week’s slide with the best number in almost four years, 352k from a revised 402k last week, while continuing claims also slid to a 3-1/2 year low. The January Philly Fed index came in below forecast at 7.3 but a hefty 3.5 points downward to December’s data left some with a bitter taste. Elsewhere the weekly Bloomberg consumer comfort index deteriorated to -47.4 from -44.7 and January’s economic expectations slipped to -19 from -17. Nevertheless, Wall St extended its rally to a third day with the DJIA rising 0.36 percent, S&P +0.49 percent and the Nasdaq +0.67 percent.

Wishing all a Happy Chinese New Year from Asia.