Market Drivers December 5, 2012
Risk rally stifled by weak EU Retail Sales
UK Services PMI misses forecasts
Nikkei 0.39% Europe up 0.31%
Oil $88.72/bbl
Gold $1704/oz.

Europe and Asia:
AUD GDP 0.5% vs. 0.6%
AUD AiG Performance of Service Index 47.1 vs. 42.8
EUR Retail Sales -1.2% vs. -0.2%
EUR German Purchasing Manager Index Services 49.7 vs. 48
EUR Eurozone Purchasing Manager Index Services 46.7 vs. 45.7
GBP Purchasing Manager Index Services 50.2 vs. 51

North America:
USD ADP Employment 8:15
USD Factory Orders 10:00
USD ISM Non-manufacturing Composite 10:00

The one-two combination of slightly worse than expected Spanish bond auction and horrid EU Retail Sales numbers reversed the rally in the EURUSD sending the pair back below the 1.3100 level in mid-morning European trade as investor sentiment turned cautious. Earlier the pair rose to a high of 1.3125 on back of the rally in Chinese equities and improvement in the EU final PMI readings.

EZ Final PMI reading showed a marked improvement rising to their best levels in more than three months helping to keep risk FX bid in early morning European trade. The EZ combined PMI was upwardly revised to 46.7 from 45.7 with German Services PMI rising to 49.7 – just shy of the 50 boom/bust level.

The PMI data shows that economic activity in the Eurozone remains in contractionary territory but if off its lowest levels of the year suggesting that the worst of the sovereign debt crisis may be over. European monetary union has been wracked by the chronic sovereign debt problems that have forced draconian austerity measures on many of its periphery member nations which in turn has weighed on both investor sentiment and aggregate demand, as slowdown spread from periphery to the core.

However, the latest improvement in periphery yields and the rebound in EURCHF which is now trading above the 1.2150 level indicate that the threat of default risk is now receding and that may ease the credit conditions in the region helping Europe recover in H1 of next year.

Nevertheless, the enthusiasm was short lived as EU Retail Sales cratered, dropping by -1.2% on a month over month basis versus forecasts of only -0.2% decline. The stress over the credit conditions in the region and the imposed austerity measures on much of the periphery economies on the continent are clearly taking their toll on the European consumer. The decline was the biggest such drop in more than 2 years and suggests that Q4 GDP will likely be anemic. Still, the stabilization in service and manufacturing sectors should ultimately translate to better aggregate demand and recovery in the first half of next year.

Elsewhere, UK PMI services posted a disappointing read printing at 50.2 versus 51.1 eyed as they just managed to remain in expansionary mode. This was the weakest result in nearly two years, confirming the thesis that UK economy continues to flatline. Cable saw little reaction to the news as all eyes will be on George Osborne’s speech later today detailing his statement to the House of Commons.

In North America, the markets will get a preview of labor data with the release of the ADP report at 13:15 GMT. The forecast is for 125K jobs, but the number could easily miss to the downside given the disruption caused by hurricane Sandy. For now risk FX is off its best levels of the day but continues to consolidate. However, if US data triggers further selling in equities, the correction in currencies is likely to steepen.

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