Stock not scared of heights, crude rallies

Forex News and Events

Risky assets continued to gains as investors piled into stocks and commodities for a second straight day. Economic data is clearly not the catalyst as US data industrial production and capacity utilization came in as expected. The biggest factor was the soothing words of ECB president Mario Draghi who reiterated that the pace and duration of European QE would not be derailed. Full blow ECB QE was announced in January and launched only in March, yet effects on FX and rates have been substantial. The weak Euro particularly is helping revive European growth and inflation (lesser extent) in the near term. Also supporting the rally has been corporate earnings surprising modestly to the upside, easing fears of dreadful quarter. In addition, the EIA reported a smaller than expected increase in weekly inventories. This gave WTI crude a bullish pushing to $56 (2015 highs) and pulling much maligned energy stocks along with it. USDCAD fell a full big figure (but has since regained losses) after the BoC opted to kept its policy rate on hold at 0.75% and crude prices surged. US treasures rallied on the direction of US economic data and broader fears coming from Greece. After a short term bullish rally, EURUSD fell to 1.0670 on news that the ECB will continued its bond buying activities. With speculation of more PBoC easing in the coming months Shanghai shook off its fear of heights rallying +2.63% to 4191.25. Finally, Australia provided a sturdy employment report, as employment grew by 37,700 in March against expectations of 15,000, and February gains were revised higher to 42,000 from 15,600. The unemployment rate dropped to 6.1% from 6.2% against expectations of a rise to 6.3%. The rates market quickly adjust to the strong report sending expectation for a May RBA rate cut from 70% to 54%. AUDUSD surged to 0.7780 from 0.7680 on the news.

On the Greek story, there are rumors that slow progress with creditors is being made. Perhaps these rumors are to lessen media reports that preparations are being made to manage a Greek default or exit. German Finance Minister Wolfgang Schaeuble cautioned that an settlement between Athens and its creditors still way off and not at April 24 meeting of finance ministers. The general consensus is that a European bailout “patch” will manage the short term risk of a default however, the risk of a Greek exits remain ominously elevated. To highlight this, ratings agency S&P downgraded Greece's credit rating stressing that financial commitments will be "unsustainable". S&P lowered long and short-term sovereign credit ratings to CCC+/C from B-/B , outlook is negative. In our view, any deep economic reforms will have negative consequence on the economy in terms of drop of confidence and further rise in political insecurity. Greece is already suffering from a financial crisis spiral as agreement uncertainty is forcing the liquidation of bank deposits, stopping foreign and domestic investments and producing broad-based tax avoidance. Therefore, the only viable long-term solution is something close to debt forgiveness (but this idea is not new). Despite the headlines on progress, we are not convinced any real solution is possible. With the next €7.2bn tranche of its bailout program coming due at the same time public salaries and pension payments, Syriza government will have to make some hard decisions. S&P noted that if a resolution is not found before the middle of May the Greek parliament might not have time to ratify any agreement in time. We remain negative on EURUSD as long as policy-makers are unable to reach a deal on bailout funds. Interestingly, while bund yields are falling and Greek yields jumping, partly due to Greek risk, however, peripheral yield have yet to price in highly probable contagion risk.