Market Drivers October 1, 2012
EZ Final PMI print a bit better lifting risk in early EU trade
UK Manufacturing PMI, housing data misses
Nikkei off -0.83% Europe up 1.23%
Oil $92/bbl
Gold at $1772.90

Europe and Asia:
AUD TD Securities Inflation 0.2% vs. 0.6%
AUD AiG Performance of Manufacturing Index 44.1 vs 45.3
JPY Tankan Large Manufacturers Outlook -3 vs. -4
CHF Retail Sales 5.9% vs. 4.1%
CHF SVME-Purchasing Managers Index 43.6 vs. 47.6
EUR German PMI 46.1 vs. 46.0
EUR Eurozone Unemployment Rate 11.4% vs. 11.4%
GBP PMI 48.4 vs. 49.5
GBP Net Consumer Credit -0.4B vs. 0.7B
GBP Mortgage Approvals 48K vs. 50K

North America:
USD ISM Manufacturing 10:00
USD ISM Prices Paid 10:00
USD Construction Spending 10:00

Risk FX turned around in mid-morning European session after starting the week’s trade with a decidedly risk off bias in Asia. Weak PMI readings from Australia and China pushed high beta currencies to fresh lows with EUR/USD breaking the key 1.2835 support to trade at 1.2802. However, slightly better PMI readings from Europe turned sentiment around, creating a bear trap as EUR/USD raced back to the 1.2900 level as European bourses rose by more than 1.5%.

German final September PMI rose to 47.4 up from August’s final reading of 44.7. The data continued to show a shrinking manufacturing sector for the 7th consecutive month, but rebound heartened investors who speculated that manufacturing in Europe largest economy may have bottomed out in the summer. Overall the final reading of EZ Manufacturing PMI improved slightly to 46.1 from 46.0 reported earlier.

Investor sentiment also perked up on reports that Greece is back in negotiations with the Troika and is likely to receive the next tranche of bailout, relieving some pressure on German banks. Former German finance minister and budget disciplinarian Peer Steinbruck speaking in Die Welt said that anyone pushing for Greece to exit the euro doesn’t know what they’re talking about and “the political and economic shocks would be devastating.”

Meanwhile in Japan the data was far less encouraging with Tankan survey printing at 3 from -1 the quarter prior as slowdown in Asia Pacific and especially China along with the relentless rise of the yen turned corporate sentiment dour in Q3 of this year. Although the result was a bit better than the -4 forecast, the Tankan recorded its third consecutive negative reading suggesting that economic conditions are showing no signs of improvement in the Land of the Rising Sun.

Japan continues to suffer from a perfect storm of negative factors as its export driven economy faces demand challenges in Europe, political conflict with China and the unyielding pressure of rising yen. Japan’s exports to Europe have fallen by 22% as the region’s sovereign debt crisis is wrecking havoc in the periphery economies depressing consumer demand drastically. In China, political furor over the territorial dispute over Senkaku islands has only exacerbated what was already slowing export market for Japan. Japanese multinational corporations such as Toyota have come under attack in China and have been forced temporarily suspend operations as hostilities flared up.

Amidst, the challenging economic conditions for Japan, the rise in the yen has only served as salt on a wound for Asia most advanced industrialized economy. Japanese officials had continued to jawbone the market warning that the currency’s strength is not reflecting the underlying fundamentals, but their efforts have been for naught as USD/JPY continues to drift lower towards its all time lows driven primarily by interest rate dynamics between USTs and JGBs. One of the primary effects of Fed’s QE and Twist actions has been to depress US long term yields which in turn has kept USD/JPY below the 80.00 level despite deteriorating economic conditions in Japan.
The newly appointed finance minister Koriki Jojima will likely raise the issue of yen appreciation at the next G-7 meeting in Tokyo on October 11th, but unless Japanese authorities undertake dramatic policy actions such as vastly expanding their own QE program, USD/JPY is unlikely to rise above the key 80.00 level in the foreseeable future.

In North America today the focus will fall squarely on the ISM Manufacturing report due at 1400 GMT. The market is looking for a third straight reading below the 50 boom/bust line and given the weakness in Chicago PMI numbers on Friday chances are good that ISM may miss to the downside curbing some of the early European risk flows. However if the US ISM data surprises to the upside breaking above the key 50 level, the news could trigger a fierce short covering rally and push EURUSD through the 1.2950 level as the day proceeds.

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