Hawkish comments coming from Germany, not concerned on deflation

Market Review

Equity markets were in the red yesterday, reacting adversely to the decent jobs numbers that were received by the markets on Friday which saw a creation of 248k jobs versus expectations of only 216k. The move lower can also be attributed to the lower than expected German Factory Orders at -5.7%, which is unwelcome at this point in time where economists increasingly is questioning the health of Europe’s largest economy. The afternoon was a slow affair across most assets as no data was about to be released from the US, which is typical for Monday’s following Non-Farm Payrolls. A stealth rally was seen in the EURSUD, especially in the later hours; this was attributed to short covering, which considering a low was posted at 1.2506 on Friday is not all that surprising, and it is hard to imagine where we were coming from mid May, all the way up at 1.399, close to 1,500 pips higher than where we are currently trading. Currently the currency pair is closing in on the key 1.20 handle which was yet to be breached properly through the financial crisis, though the current speed at which we are heading there may indicate that on the fourth test since 2008 we will see a breach. Considering the monetary policy measures on both sides of the pond this is fundamentally viable as well.

Today's Fundamental View

This mornings industrial production numbers from Germany have led to further doubt about the central European economy, and the sentiment is officially changing from neutral to negative. One economist has already stated he believes the German manufacturing sector is in a recession, which although technically is not true, although considering recent data may not be far off reality. To this Germany has commented they do not see deflation risk in the economy, and sites the IMF which sees the global recovery continuing. It is worth noting this in the light of the recent ECB press conference where Mario Draghi was more hawkish than expected and participants were wondering where this stance was coming from. These type of comments come from Germany where there is no concern on deflation, we may see a divergence in policies which eventually can be catastrophic for the currency union. We should not be too dramatic however, the ECB has very recently embarked on measures which we have yet to see the results off in the real economy. This afternoon is likely to see more action than yesterday with minor jobs data and an economic sentiment indicator, although as you may take from our language we do not see either of these as big events. This afternoon we are bearish on equities, bullish on treasuries and bearish on the EURUSD. Crude oil is a difficult call with no news, though we favour the short side amid no escalation on the geopolitical front.