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IG's trading wrap

IG's trading wrap

Traders are still second guessing whether the sizeable downgrade to the ECB’s growth and inflation forecasts changes the underlying bid seen in EUR/USD in recent times. We feel that it has certainly taken a significant amount of wind out of the EUR sails and in theory should see the pair underperform relative to other risk-associated currencies in G10. Particularly the NZD, given the RBNZ are focusing on the longer term and expect growth to ‘accelerate to between 2.5% to 3% over the next two years’.

EUR/USD respected and held the 38.2% retracement of the November-December rally at 1.2949 yesterday. Perhaps this could be telling, and it could be the platform for the single currency to march back above 1.30. Digging below the surface though, sharp moves in the interbank market (EONIA) really saw traders stand up and take notice. While the discussion on negative deposit rates was not fully expected, we feel there’s little chance of the bank imposing these rates.

That is until the monetary transmission mechanism is functioning in a more healthy manner, which in theory won’t happen until Spain requests the OMT program. The double kicker Spanish bonds could get if they request assistance from the ECB, who subsequently impose negative yields, should cause money to fly away from the ECB’s balance sheet into northern European debt and potentially Spanish bonds, (given the debt would effectively be underwritten), which in turn would push yields even lower.

Some of those funds could even make their way into the real economy, though a more likely home would be UK gilts and US treasuries, in which EUR/USD heads to 1.25 on the back of the sizeable outflows. German November industrial production is due in upcoming trade. Given part of the reason for the significant ECB downgrade was the slowdown in core Europe, this print could actually have a strong bearing on risk assets like EUR, equities and commodities.

Asia is a sea of green, albeit modest, and today it was the turn of Australia to lead from the front with the market keen to run with momentum and bid up the year’s winners. Perhaps this will be a trend that will continue til the end of the year, but traders are continuing to bid up healthcare and financials stocks, with both sectors up over 1%. Buying the stocks with high yields has been the equity trade of the year, and not only are you getting paid (income) to be in a position, you also get the double kicker of capital appreciation, something you just wouldn’t have expected in early 2012. China is seeing modest buying, which could be a sign that investors there are hoping to see further signs of a recovery in this Sunday’s data dump (CPI, PPI, fixed asset investment, industrial production and retail sales).

We highlighted the DAX yesterday and again the momentum this index is displaying is incredible. To think it is already up 27% ytd, despite negative yields on German bunds is astonishing. Traders are almost hoping the index falls so they can get a more attractive entry point to take part in the rally. The French CAC is also looking very constructive and our call of 3617 will see the French market print a new high for the year and suggests the bourse could then target the March 2011 low of 3693. US futures aren’t giving too much away at present and while our out-of-hours clients have been fairly subdued, the bias has been to buy thus far. US payrolls are the highlight of course, and while the impact of ‘Sandy’ may see poor numbers being shown an element of leeway, the impact won’t have affected much more than 50,000 jobs, so there’s only so much this market will forgive. A close above 1424 on the S&P (Mondays high and 61.8% retracement of the 1474 to 1343 move) would be positive and suggest the index is ready to join its US counterparts in trending higher again.

Ahead of the European open we are calling the FTSE at 5913 +12, DAX 7558 +24, CAC 3617 +16, IBEX 7960 +50


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