TRADERS´ Blogs

The markets have been without any major catalysts this week after last week’s data and central bank fest. Some dreadful UK industrial and manufacturing production data this morning (industrial production fell 2.5% between May and June) along with some negative German factory orders failed to deter the bigger picture, which remains risk positive.

 A big day for Draghi:

On Thursday 2nd August 2012 the ECB will announce its latest policy decision at 1245BST/ 0745ET.  At 1330 BST/ 0830 ET, ECB President Mario Draghi will hold a press conference explaining the Bank’s decision.

The markets will be particularly interested in hearing from Mario Draghi as he recently boosted expectations that the Bank would take action to reduce the borrowing costs for Spain and Italy at this month’s meeting. Without spelling out the steps the Bank would take, Draghi said at a conference in London last week that the rise in sovereign borrowing costs for Spain and Italy had impaired the effectiveness of its policy tools and it would do all it could, within its mandate, to support the euro.

It’s been a fairly lethargic London Session so far, which is typical in the build up to and FOMC/ ECB and NFP week. However, European politicians continue to dominate the headlines making the outcome of the ECB meeting even more difficult to predict.

• A weak ISM could give the Fed cold feet
• USDJPY at a crossroads
• Are lead indicators giving us a signal?
• The core start to drag Europe lower
• One to Watch: Brent crude oil

USDJPY is in focus as we wait for Bernanke and co. to emerge from their latest two day meeting. The disappointing ISM manufacturing data that remained in contraction territory for the second straight month makes the outcome of the Fed meeting slightly less certain; however we continue to think that the Fed will hold fire from adding more QE when it is done with its meeting later today. The economic data has been extremely mixed and the outlook for the US economy remains incredibly cloudy. Although consumer confidence picked up last month, the weakness in the ISM manufacturing survey is worrying. This report still has a fairly strong positive correlation with GDP, which suggests that Q3 got off to a bad start for the US economy after a softening in Q2. The detail of the survey was also fairly weak: new orders remain below 50 at 48, the back log of orders is also negative and contracted further compared with June, the employment index remains above 50 but fell to 52.0 from 56. 6 in June.

It’s been a fairly lethargic London Session so far, which is typical in the build up to and FOMC/ ECB and NFP week. However, European politicians continue to dominate the headlines making the outcome of the ECB meeting even more difficult to predict.

• Waiting for direction from central banker
• Germany throws a spanner in the ECB’s works
•  Economic data shows signs of stabilization in the US economy
• One to Watch: USDJPY

Can Merkel, Hollande and Draghi save the Eurozone? 

As we start a new week there are high expectations for official action from the European authorities to reduce the credit costs for Spain and Italy, the latest victims of the sovereign mess. This comes after fighting talk from ECB President Mario Draghi on Thursday who said that the Bank would do “whatever it takes” to save the euro. Next the German and French leaders came out and also pledged to defend the single currency from attack.

• An economic miracle?
• No justification for more QE in the US
• Some advice Mitt Romney should give London
• Digesting Draghi – day 2
• Market moves

After focusing mostly on Europe and in particular Mario Draghi, the markets have had to adapt to a better than expected Q2 GDP report from the US. It showed that the US economy expanded by 1.5% in Q2 on an annualised basis. Although that is below the 1.9% rate in Q1 it was above the consensus 1.4%. The markets reacted in typical fashion: buying the dollar and selling Treasuries, causing yields to rise and dragging USDJPY higher with it. But will the GDP report alter the course of the FOMC meeting that concludes next Wednesday?

• UK GDP – blame it on the weatherman…
• Will the BOE pull the trigger on more stimuli next week?
• Greece – in the default zone
•  A sovereign puzzle with no answer forthcoming

The UK economy contracted by a deeper than expected 0.7% in the second quarter suggesting that the recession that started in Q1 is here to stay for a while longer. The detail of the GDP report suggested that the economy was dragged lower by the mining, construction and hospitality sectors, while the service sector managed to hold up fairly well. The particularly sharp 9.7% drop in the construction sector was much worse than the 5.2% decline in Q1, and may have been adversely affected by the weather (the wettest June on record) and the Queen’s Diamond Jubilee bank holiday, which is more likely to impact productivity in the manufacturing, mining and building industries than the service sector, which may have benefitted from an influx of tourists and more people being off work at the start of June.

The markets have been much more anaemic today after the excitement of Friday and Monday’s sessions, however, the same stresses and strains continue to be the dominant factor moving market, which leaves risky assets vulnerable to another break to the downside.

Europe remains front and centre, in particular Spain, and there was no let-up today. The chief concern is whether or not Europe, the IMF and the ECB can afford to bail out Spain, and maybe even Italy.  It is still unknown whether or not the Eurozone could survive if its fourth largest economy collapsed, and this is likely to weigh on markets for some time. In fact some people are surprised by the resilience of the euro in the face of Spanish bond yields rising to fresh euro-era highs. We put down some of this resilience to the unwinding of euro-funded carry trades as traders turn risk averse.

• The markets fail to get the QE3 go-sign from Bernanke
• Bernanke passes the baton to politicians
• Risk gets knocked off its highs – where to now?

The markets had been in buoyant mood leading up the Bernanke testimony, however he failed to throw them a bone and they have given back some of their earlier gains. Bernanke told those gathered at Capitol Hill that US growth seems to have decelerated in Q2 and that the slowdown in jobs growth is only partly to do with the weather. He also said that there are still factors that could hinder the housing market recovery. While he blamed some of the economic weakness on the Eurozone situation he also mentioned that the other important risk to the US recovery is the US’s own domestic situation. Bernanke took a leaf from the ECB’s book and rather than pledge more action from the Fed, passed the baton to politicians.