Market Drivers for July 10th, 2012
Chinese Trade Data better but imports sink
UK data beats across the board with MP/IP rising strongly
Little progress in Brussels on ESM bond buying and markets await GE constitutional court ruling on program
Nikkei off -0.44% Europe up 1.06%
Oil at $85/bbl
Gold $1589/oz.

Europe and Asia:
AUD NAB Business Confidence -3 vs. -2
JPY Consumer Confidence 40.4 vs. 40.9
NZD NZIER Business Opinion Survey -4 vs. 13
GBP RICS House Price Balance -22% vs. -15%
GBP Industrial Production 1% vs. -0.2%
GBP Manufacturing Production 1.2% vs. -0.1%
GBP Visible Trade Balance -8.4B vs. -9B

North America:
CAD Housing Starts 8:15

Risk currencies spent most of Asian session in cautious, listless trade following the release of the Trade Balance data from China, but sentiment improved markedly at the start of European dealing as drop in bond yields and surprisingly robust economic data out of UK helped spark a short covering rally that took EUR/USD back above the 1.2300 level and Aussie above 1.0200.

In China the headline Trade Balance numbers printed much better than forecast rising to 31.7B versus 24B eyed, but investors were perturbed by the sharp falloff in imports which increased only 6.3% versus 11.1%. The news initially triggered a small selloff in risk with Aussie dropping more than 30 points in the aftermath of the release as markets speculated that the decline in imports was a sign of sharp deceleration in Chinese demand.

Nevertheless the overall Trade Balance number was the best in nearly 4 years with export growth exceeding expectations as demand for Chinese products remained robust despite the deepening recession in Europe. The data out China shows that the world’s number two economy continues to expand at more or less expected pace alleviating concerns of a synchronized global slowdown triggered by the EZ credit crisis.

As Europe opened, credit spreads began to narrow providing better support for high beta FX and strong UK data spurred a flurry of short covering activity that lifted risk currencies across the board. In UK both Manufacturing and Industrial Production numbers blew out the estimates with former rising by 1.2% versus -0.1% forecast while the latter increased by 1.0% versus -0.1% expected. The gains in the manufacturing sector were partly due to an extra working day in May, but nonetheless reflected better tone in business activity. More importantly UK trade deficit shrunk to -8.4B versus -9B forecast as export growth helped narrow the gap.

Cable responded well to the data rising to a high of 1.5547 in the aftermath of the report and may remain well bid into North American session if risk flows continue to be supportive. In North America the calendar is once again nearly empty with only the IBD investor optimism survey on tap, but both currency and equity markets may take their cue from Europe and help extend the rally in risk barring any unforeseen headline shocks. While investor sentiment remains unremittingly gloomy, the latest patch of global economic data shows a much less pronounced slowdown in business activity than anticipated and that divergence between expectation and result could provide a boost to the bulls as short covering pushes risk currencies higher.

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