Good euro fundamental data upticks risk assets

Market Review

Yesterday’s market movement was contained in equities, although many other assets saw some decent volatility. The EURUSD had some weight coming in from the morning onwards as reports came in that 11 banks had potentially failed the stress tests laid out by the ECB. As these rumours came to the market, a spokesman played down the possibility of bond purchases which further played in to a weaker economy behind the joint currency. US CPI numbers were marginally higher than expectations and 0.3% higher than the previous number, giving the Federal Reserve more space to manoeuvre around the expected rate hike next year; and on the back of it we saw a rather sharp sell off in the 10 year. Crude oil was also a big mover during yesterday's session after the Department of Energy release showing a much larger build than expected at 7.1M vs 2.8M priced in. With this we saw the $80 handle being flirted with at the end of the day.

Today's Fundamental View

This morning has seen a slight uptick in risk assets, led by European fundamentals which have seen both German manufacturing and services numbers beat on expectations, while Spanish unemployment rate falling to its lowest level since January 2012. Overall European numbers in the manufacturing and services sector was also positive. Although we are not overeager about changing our view on a single piece of data, the overall sentiment may last if the data continues to perform. A notable improvement this morning was Spanish Unemployment, where the curve for unemployment has been negative since the high at 27.2% in April 2013. For the session ahead Initial Jobless claims for the United States will hit the markets at 1330BST, with a market consensus of 269k. Although we are positive on the trend, we do not believe the number will be as good as last month's stellar 264k. We remain bullish as long as it remains around the 300k handle, meaning that within our realms it can be even 320k and our outlook on the economy will not change. However, with a number at the 300k mark today may be viewed negatively as the number priced in is exceptionally low. We have had five consecutive weeks below the 300 handle so any move above this could again be taken negatively. We are bullish on housing numbers this afternoon, as are we on the Manufacturing PMI number due at1445 BST. Traders have noted that the ECB bond purchases which started Monday will exceed €800 million. Today’s strategy will be long on stocks and short on all other asset classes.

Alternative View

Traders should remain wary and informed of any geo-political risk events that may develop as the day progresses. If the positive European sentiment continues it may invalidate our short EURUSD strategy.