Market Drivers Mar. 22, 2016

Terror acts in Brussels create waves of risk aversion
German data better than forecast
Nikkei 1.94% Dax -1.02%
Oil $41/bbl
Gold $1255/oz.

Europe and Asia:
EUR Composite PMI 53.7 vs. 53
EUR GE IFO 106.7 vs. 106
GBP UK CPI 0.2% vs. 0.4%

North America:
USD Flash Manufacturing PMI 9:45

It’s been a volatile night of trade in the currency market as terror bombings in Brussels spurred a wave of risk aversion flows sending USD/JPY and EUR/USD lower by nearly 100 points in morning European dealing.

At least 13 people were dead in four separate explosions in Brussels three of which were in the metro and one at the airport. It’s not clear if all the explosions were caused by suicide bombers but they appeared to have clearly been a retaliation for the recent arrest of the mastermind behind the Paris attacks last year.

Since Brussels serves as the official seat of the European Parliament and the unofficial capital of the EU, the incidents had special resonance in the markets and in the aftermath of the news the euro saw heavy selling as risk aversion flows swamped the market.

The political developments stood in sharp contrast to the economic news which actually surprised to the upside with EZ Flash PMIs coming in line for Manufacturing at 51.4 and a bit better for services at 54.0 vs. 53.3 eyed. The IFO data showed an uptick as well printing at 106.7 versus 106.0 forecast as expectations component rose to 100.00 from 99.5 projected. The ZEW survey however was weaker at 4.3 vs. 5.4 anticipated.

Overall, the IFO survey which survey businesses seemed to indicate that demand had stabilized as conditions in emerging markets calmed over the past few months. On the other hand the ZEW respondents which are mainly investors were concerned about the rise of the euro and the still volatile conditions in commodity markets. There is no doubt that the rise in euro is going to make it more challenging for German exporters to gain traction over the next few months. Despite the overall positive reading the German Manufacturing PMI declined to 50.4 and now stands on the cusp of the boom/bust reading.

Meanwhile cable was weaker as well with sterling losing a full cent off the session highs as the pair dropped to a low of 1.4252 before finding some support. UK CPI data came in at 0.2% vs. 0.4% while Public Sector Net Borrowing rose to 7.1B vs, 6.0B projected, The news out of Brussels also had a large impact on the pair as traders worried that the increase in terror activity would only strengthen the Leave vote which has been capitalizing on eurosceptic sentiment to gain momentum.

In US the calendar is barren save for Flash Manufacturing PMI readings, but any further news from Brussels will surely affect trade flows as the day proceeds. For now risk aversion sentiment continues to dominate and both euro and cable look like they are vulnerable to further selloffs.

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