Health check on European banks allays concerns over economy

Market Review

Last week was interesting for the equity markets as they continued to rebound from the recent sell off due to questionable European and global economic growth and concerns about the momentum of a continued US recovery. The bears were thrown aside as manufacturing and services PMI data from mainland Europe posted higher than expected numbers. As a note on the employment sector in the US; initial jobless claims posted its sixth consecutive number below the key 300k handle, and although higher than the expected we believe any number below 300k should be considered good and stable in terms of employment recovery; and combined with overall decent earnings reports this set the stage for one of the best equity weeks in a year. The strategy entry on the EURUSD was obtained to the tick on Friday, and should have been closed around 5PM which would have yielded a maximum of 36 pips.

Today's Fundamental View

After Friday’s stress test results were revealed we have expected some downside, which after an initial positive open has been the case with the German Dax 150 points off the earlier high as a result of yet another another decline in the IFO economic sentiment reading. The euro has also started feeling it this morning, and the 1.27 handle is seemingly a difficult resistance area, in conjunction with R1. In terms of the stress tests continuing to linger on the market, analysts have mostly noted a positive sentiment on the back of it as the banks identified can or have already raised enough capital to reach the requirements which should alleviate pressure from the financial sector. This afternoon the most important piece of data will be Pending Home Sales, which should post a decent number as the housing sector as of late has been performing well; with Friday’s New Home Sales being more or less in line with expectations. A milestone will be reached this week as the Federal Reserve will completely halt the two year old QE3 program which has at its peak seen the monthly purchase of $85 billion worth of bonds in an effort to rekindle the financial markets. For the time being the Fed will continue to sit and re-invest its record $4.48 trillion balance sheet. The effort of not unwinding will keep interest rates stable and low for the foreseeable future. Today’s US session is likely to be a relatively slow one after a busy morning, albeit with daylight savings increasing the US/European crossover by 1 hour there may be some surprises in terms of volatility. The strategy today will continue to be long equities and short all other products on the report.

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.