World Markets weekly write-up – November 14th

The week that was:

 

Key week for Europe, the Eurozone’s prospects and very much the focus of global markets. For several days it was not clear who would lead the next Greek government. On the Italian shores, similar uncertainty regarding the future of the Italian government triggered a severe bond market sell-off, set record highs in yields across the curve and led to a clearinghouse margin call for Italian debt. The house of Bunga was finally shut over the weekend, event that precipitated what looks to be a very short term relief rally in global markets.

On the upside, we got two technocrats in the face of Lucas Papademos and Mario Monti to lead the “unity governments” of Greece and Italy respectively, both of whom  – and unlike their predecessors-  seem to know what they are talking about, have an appropriate CV for the situation and also have so far enjoyed broad support from the market and more importantly from their people.

There are still many questions unanswered. The constitutional set up of the Eurozone and potential future amendments to the Treaty. The success of the new unity governments to push on the approved reforms in the time allocated (the Greeks have 100 days). The structural issues of Europe and last but not least the EFSF’s capacity for actually supporting the bond markets (see here)

 

In the week ahead: “I can get no satisfaction”

 

The key market focus is bound to remain within the Eurozone’s two problem children and their respective new governments. Eyes will also be on Italian bond market valuation and ECB participation in supporting it as well as headlines that will surely follow Weidmann’s comments from this morning [ECB should not decisively intervene in bond markets]. Another focal point will surely be Eurozone’s child #3 (Spain) and its upcoming bond auction this Thursday as well as the general election this Sunday. The markets are at a point of chasing for next blood by
the looks of it and nothing seems to be able to stop this until we get some game changing statement from someone (the ECB stating it will “print and buy” until the cows come home would be a good start). Already today, the spreads, most notable Spain 10Y over bunds, are heading the way wider still.

Some interesting data also out – see shortlist below -, but I seriously think the focus is on structural rather than cyclical stuff as everyone is convinced by now of an upcoming multi region double dip. So I guess only stellar data and upside surprises will change this. And I cannot see any forthcoming  in the list below for this week..

So with regards to trading and market direction, volatility and nervousness notwithstanding, the educated guesswork still points towards short risk, buying USD dips, selling any EUR pretty much anywhere whilst being short equities perhaps with a bit more cautious hat on as they have a habit of multi standard deviation daily moves of late. Amidst this environment (and with more mid term thinking than the week ahead), GBP ought to have the last word and an incremental benefit given a) that it has been and remains at least 10% undervalued vs G10 ccy basket under all fair value methods I know b) Is the new kid on the block on the agenda for safe havens (with CHF having a ceiling, with JPY being JPY and with other haven candidates being simply too small). Not convinced about either direction in Cable from here as the USD is having its own risk off/prospective positive flow agenda, but I can certainly see GBP/EUR keep inching higher week after week.

 

 

Key Data for the week ahead:

 

Today:

Eurozone Industrial Production (Sep): Following weak national IP numbers in a number of countries, Eurozone IP will likely drop by about -2.3% mom, according to consensus. [ -2%, better than expected the actual number]

Tuesday 15/11

UK CPI (Oct): With the BOE still in QE easing mode and inflation running at 5% and above, it is always interesting to see if there is any sign of abating price pressures. Consensus expects a reading of +5.1% yoy after +5.2% yoy in September.

German, French, Eurozone GDP (Q3): There will be a raft of Eurozone GDP data covering the third quarter, though higher frequency data suggest that most of the recent slowing in activity data will only be reflected in the next GDP release. For Q3, consensus expects the following qoq non-annualised numbers: France +0.4%, Germany +0.5%, Euro Area +0.2%.

Fed Speeches: With the rising focus on the Fed policy options going forward, Chicago Fed President Evans’ speech on the Dual Mandate may be interesting. Evans is also scheduled to appear on CNBC, while Fed’s Bullard, Williams, and Fisher will all make public appearances.

US Retail Sales (Oct): After a strong reading last month, consensus expects some slowing to +0.3% mom after +1.1% in September.

Wednesday 16/11

Eurozone CPI (Oct): Despite the elevated readings in CPI in recent months and consensus expectations that the October number will again come in at +3.0% yoy, the focus is probably slipping away from inflation fears. With more fiscal contraction and slower growth in many Eurozone countries, inflationary pressures will likely abate over the medium term. Only a substantially higher reading than expected would change market expectations of further ECB rate cuts to 1.00%.

UK Labour Market Data (Oct): Consensus expects a slight increase in the unemployment rate to 5.2% from 5.1%.

US CPI (Oct): Market expectations are for a stabilisation in core and headline inflation pressures. The expected small uptick in the year core reading to 2.1% from 2.0% yoy will likely be offset by a decline in the headline component to 3.7% from 3.9%.

US TIC Data (Sep): More than the headline number, the composition of TIC flows will be important. With risk aversion still very high during September, we would expect more inflows into USTs, but at the same time small net outflows in all other categories.

US Industrial Production (Oct): Consensus expects a small improvement to +0.4% from +0.2% mom in September, and a small increase in capacity utilisation.

BOE Inflation Report, Fed speeches from Lacker, Rosengreen.

Thursday 17/11

UK Retail Sales (Oct): Consensus expects a notable slowing in UK retail sales growth to -0.3% mom (ex auto fuel) from +0.7% in September.

US Philly Fed Survey (Nov): With the Empire earlier this week and the Philly fed index, the monthly survey season starts again. Consensus expectations are for a stable reading of +9 from 8.7 in October.

US Jobless Claims (weekly): After better readings in recent weeks, there will be some focus on whether US activity is starting to accelerate further.

Also: US housing starts, Fed Speech by Dudley, RBA Minutes.

Friday 18/11

Canada Consumer Prices (Oct): Consensus expects consumer prices to drop notably to +2.7% yoy from 3.2% in September, while m/o/m core readings are also expected to decline, to +0.1% from +0.5%.

More Fed Speeches: After a week full of public appearances by Fed officials, Friday will see the second appearance this week by Dudley (on the economy), as well as Fisher and Williams.