EURUSD strangely bid after this morning's data

Market Review

The market yesterday was very quiet and did not have much to move on in terms of news or data, with only one release from the US in the shape of Existing Home Sales which came out slightly worse than expected – but still above the key 5 million handle which now has been breached for three consecutive months. FOMC voting dove, William Dudley, has urged patience in interest rate hikes. This has helped on treasuries which have been bid for two consecutive sessions and is currently on its way to making a third. Concerns about slower growth in China led to a further sell off in crude, adding to the negative sentiment that has been in place since the high of the year was posted 20th June at $107.73. The strategy entries on both equity indexes were stopped during yesterday’s risk off sentiment.

Today's Fundamental View

Overnight the HSBC Manufacturing PMI number exceeded expectations and gave relief to yesterday’s negative sentiment regarding the Chinese economy. The S&P was positively correlated with the data overnight and followed the Chinese stock market slowly upwards, but this was capped as European traders came to their desks. European flash manufacturing and services data have been mixed, with the German manufacturing number standing out with its lowest reading since June last year. This morning has seen some decent movement in the FX sector with the EURUSD being strangely bid after this mornings data, which has less to do with the data in the Euro-zone and more to do with the doubt the market has on the US recovery and the USD index which was down -0.33% as of 11:00BST. Treasuries have also been hugging the highs in a risk-off attempt; the US treasury has unveiled plans to limit US companies’ ability to benefit from tax inversion by buying foreign companies. This has directly hit AstraZeneca which the speculations surrounding a takeover by Pfizer remains. It is likely that this continues to be a theme for the rest of the session, although we do not necessarily disagree with the treasury in their efforts. As US10Y is edging higher this is likely to be supported by movement in the bund as Germany plans to limit their bond issuance next quarter to €4 billion, and speculations goes towards the appetite for the low yield may be a driver and low issuance may help keep borrowing cost down. This afternoon we expect the US side of the flash manufacturing data which have been mixed in Europe and China. As of late the data has been decent and increasing, although industrial production and manufacturing production were down from the month before. New orders latest number was at multi-year high, and the divergence between the US and Europe only seems to be increasing. Today’s strategy is a cautious long in the S&P due to the manufacturing data, although we are painfully aware of the movement that has seen the upward direction the last couple of sessions change. Crude oil has been on the back foot, and although we are longer term bulls we do not wish to trade against the direction. EURUSD and US10Y will both be long today, which may be seen as contrarian to the equity strategy.

Alternative View

Any geo-political risk should be carefully analysed, with continued focus on Ukraine as well as US data being a key catalyst for movement today. Monetary policy comments from the US will carry weight.