Wednesday update..USD turn? or another Dead Cat
Weaker retail sales were the catalyst for a USD sell-off yesterday although early signs are maybe not so good for a sustained and more meaningful bounce.
- Chinese GDP came in at 7% maybe flagged well enough not to disappoint although surely weaker Industrial production in March ( 5.9% instead of the forecast 6.9% ) made up for it. Whichever way you look at it recent trade, GDP and Industrial production data are all pointing to a further slow down in China. Of course that leads to expectations of further stimulus which may sustain equities for a while longer. However,are markets really paying enough attention to China’s slide?
- EUR/USD hit a high of 1.0707 yesterday but was pretty short lived and we are back at 1.0615 this morning. Some expectations of a more hawkish Mr. Draghi might have spooked shorts but for now at any rate the bounce all looks a bit ‘dead cat ‘ .
- Greece of course still hangs a shadow over any EUR recovery and leaks from many officials all seem to be suggesting a pessimism over the situation. Grexit odds certainly have shortened and peripheral bond yields have uncoupled from the core in recent days. The weakness has been fairly muted but has at least shown some nerves do exist despite the ECB QE back stop. Any hint from Mr. Draghi that the QE could be wound up early could be a real shocker although I don’t buy the idea he will say anything of the like.
- Forex..USD correction may be over as EUR/USD slides back to 1.06 following 1.07 highs. I still favour more of a USD correction ( lower) short term so I wont be chasing EUR/USD or GBP/USD down from here. The latter has recovered some ground against the EUR as election nerves have dissipated , prematurely I would guess. AUD dumped on the China data back at 0.7586 from the mid 076 level. All in all I think sitting on sidelines is a safer bet on the USD. We may still get a spike down in EUR/USD but that will be exactly what it will be and USD bulls are still vulnerable to a squeeze to my mind.
- Equities..Chinese data taken in its stride and bad news still remains good for the time being as far as stocks are concerned. Quite how much of the equity strength is driven by corporate ‘ buy backs’ is difficult to prove but fundamentals are surely not behind the rallies.
- Bonds..US yields dipped on retail sales data with 10 YR. at 1.89% and helping that brief turn in the USD. German yields a whisker lower ( 0.13% 10 YR. ) although peripheral bond weakened as Greek worries begun to weigh on some.