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European sovereign debt concerns rumble on ahead of US Thanksgiving holiday

European sovereign debt concerns rumble on ahead of US Thanksgiving holiday

By Mike Jones

Some differentiation in investors choice of vehicle seems to be the theme of markets last night, the EUR still saddled with sovereign doubts, the US still delivering mixed economic data but for a number of markets and currencies, including the NZD and AUD, there's real demand from commercial and sovereign investment flow.

Of some note is the demand for the AUD helping to edge the NZDAUD cross lower, sustaining a stop loss run that saw some technical accounts exit "long" NZDAUD positions as the market moved through the 0.7765 level. Our own “fair value” model for all intents reflects the NZD’s traded range so far this week, pegging the currency in a constant 0.7590/0.7790 range.

The pieces of the “fair value” jigsaw relatively steady, with the influence of news from Europe, North Korea and rating agencies helping to drive the market to reflect fair value. The day head is again light from a local data perspective, while Australian Pvte Capex and Japanese Trade data will be monitored during the Asian day. This ahead of tonight's Thanksgiving holiday in the US which will probably encourage many market players to sit on the sidelines.

Though in saying that, there's got to be a better than even chance news from somewhere in Europe will cause some roil and give traders some focus. On the day, extended rallies should be limited to the 0.7650/0.7675 window with ongoing broad support eyed at the 0.7550/0.7575 area. The European session continued its bias of pressure on periphery sovereign debt, with Ireland's downgrade noted and colouring sentiment as did the largest national strike in 22 years in Portugal.

Despite fronting up for assistance the concern is Ireland will struggle to have the political ability to carry out austerity plans required to ensure their expected EUR85bio of financing. The murky detail of all this (and more) and the concern an economy the size of Spain may yet be dragged into requiring assistance kept the EUR on the back foot through most of the night. ECB borrowing in their 91 day window doubled expectations to EUR38.2bio - on increased application to the facility by periphery nations banking names, overshadowing improved data readings from IFO which made little impression.

US data printed a somewhat mixed tale, a lot made of the improvement in weekly jobless claims at 407k (435k e), for contrast home sales and prices data was poor and personal income & spending updates were close to forecast. UST's have backed up in yield, again positive equity markets of some focus as is investor wariness ahead of an auction of 7Y debt.

Yesterday morning the Minutes of the November FOMC meeting contained few surprises. Members differed over the benefits of more QE, with some expecting it to have limited economic impact, but putting unwanted downward pressure on the USD and too much upward pressure on inflation. But the majority expected QE to boost growth and employment.

The Fed revised down its growth forecast for 2011 to 3.3%yoy from 3.8%yoy, while the jobless rate was revised up to 9.0% from 8.5% for Q4 2011. Overnight in European the bears drove the first shift, pushing the USD another notch higher amid a further paring back of risk. EUR/USD was sold aggressively, briefly pausing around the key technical levels of 1.3334 (August 2010 high) and 79.72 (DXY) before slumping to the 1.3280 level despite the improved IFO updates.

UK GDP revised Q3 data showed a healthy rebound in exports though overall there’s little in the release to change our view that the UK should register a slower growth performance in Q4, but probably manage 0.5% or so. The bigger test will come next year, as the impact of falling real government spending begins to bite.

The raft of US data ahead of the Thanksgiving holiday also included October durable goods, which declined a much larger than expected 3.3% mom, and core PCE inflation which came in at a new all-time low of +0.9%; below the 1% forecast. The previously mentioned plunge in weekly jobless claims to 407k would if sustained in coming weeks bode well for a ramp up in the January NFP report.

* Mike Jones is part of the BNZ research team. 

All its research is available here.

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