Market Drivers July 19, 2012
Spanish Auction show higher yields and North/South divide continues
UK Retail Sales miss on weather related factors
Nikkei 0.79% Europe up 0.22%
Oil at $90.60/bbl
Gold at $1579/oz.

Europe and Asia:
AUD NAB Business Confidence -2 vs. -1
JPY All Industry Activity Index -0.3% vs. -0.2%
CHF Trade Balance 2.25B vs. 2.21B
EUR Eurozone Current Account 10.9B vs. 5.3B
GBP Retail Sales 0.1% vs. 0.6%

North America:
USD Initial Jobless Claims 8:30
USD Philly Fed 10:00
USD Existing Home Sales 10:00
USD Leading Indicators 10:00

The euro tumbled in morning European trade in the aftermath of worse than expected results of the Spanish bond auction, but managed to stabilize and recoup all of its losses as the session progressed on news that EFSF may set aside funds to buy Spanish government bonds . Spain auctioned off 2014 bonds at yields of 5.0302% versus 4.483% in June with bid to cover ration declining markedly to 1.90 from 4.26 the period prior.

The news sent EUR/USD tumbling towards the 1.2260 area but the pair stabilized and staged a vicious short covering rally recouping the 1.2300 figure as currency markets continued to ignore the ever widening gap between North/South finance. At the same time as Spain’s financing costs continued to rise, France was able to auction off 2016 paper at 0.53% versus 1.89% in January.

Part of the reason for late morning optimism was the release of draft of memorandum of understanding that indicted that the EFSF will be able to buy Spanish bonds and subordinated debt in order to stabilize the troubled Iberian credit markets. EZ fiscal officials are beginning to realize that the current situation is simply unsustainable and that the Southern European economies will require immediate debt relief if they are to remain in the union. However, despite the progress on the EFSF talks, the question remains whether the funding will be large enough to pacify the credit markets going forward.

Elsewhere in UK Retail Sales missed their mark printing at 0.1% versus 0.6% eyed as weather related factors depressed demand in the month of June. Retail sales ex auto fuel retail sales were up 0.3% on the month and by 2.2% on the year. Food Sales in particular were hit the hardest with decline of 0.7% as the wettest June since 1910 kept many shoppers away from the stores. Without a fall in food sales the overall sales number would have risen significantly as non-food sales rose 1.2% on the month, with all categories posting increases on the month.

The news suggests that consumer demand in UK may be stabilizing but the weaker overall number will nevertheless weigh on Q2 GDP figures and will keep BoE in a dovish posture for the foreseeable future. Cable sold off on the news dropping by about 30 points in the aftermath of the release but remains relatively firm in light of supportive price action from equities. If risk appetite continues in the US session the pair could make another run at the 1.5700 barrier as the day proceeds.

In North America today the market looks at existing Home Sales and Philly Fed numbers with traders looking for marginal improvement in both. The better risk appetite and the renewed hopes about the EFSF could provide further boost to high beta FX later in the day especially if the eco data proves supportive, but we continue to believe that the latest move is simply a short covering rally as concerns over EZ sovereign debt woes are not likely to evaporate anytime soon and will put fresh downward pressure on the euro in due time.

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