Market Drivers for October 22 2014

MPC minutes show concern with global slowdown

Rumor that ECB will fail 11 banks on stress test send euro below 1.2700

Nikkei -2.64% Europe -0.63%

Oil $82/bbl

Gold $1247/oz.

Europe and Asia:

AUD CPI 0.4% vs. 0.6%

GBP MPC Minutes 7-2

North America:

USD CPI 8:30

CAD Retail Sales 8:30

CAD BOC Rate 10:00

Both cable and euro came under selling pressure in morning European dealing on a variety of investor concerns with the region. In Europe rumors of possible failure of ECB stress tests by as many as 11 banks cause the EUR/USD to tumble below the 1.2700 mark with the pair finally stabilizing at 1.2680.

Spanish news service Efe reported that up to 11 banks most of them from the periphery of the EZ including several Greek, Italian and possibly Portuguese financial institutions will fail the ECB stress tests with results scheduled to be released on Sunday. So far these are minor players in the EZ financial sector and are unlikely to have much of an impact on the region’s credit structure. Nevertheless the news unnerved the markets with traders especially concerned about the prospect of one of the bigger German banks making the list. For its part the ECB refused to confirm the speculation and noted that full report will be available on Sunday.

If the Sunday announcement does confirm that the weakness is limited only to the small regional players the euro may breathe a sigh of relief, but today’s price action suggests that investors are becoming increasingly skittish about the region’s financial stability especially if the contraction in demand continues. Tomorrow’s EZ PMI data could offer a better clue as to the conditions on the ground.

Meanwhile in UK the latest release of the MPC minutes suggested that BOE will remain cautious on the monetary front as members are becoming increasingly concerned about the slowdown of activity in the region. The minutes revealed that MPC is worried about the weakness in Euro area negatively impacting UK growth and also noted that price pressure remain weak and wage growth low, not justifying any rate hike in the foreseeable future.

The news knocked cable all the way to 1.6010 before the pair rebounded to 1.6040. Although the MPC minutes were unsurprising given the latest batch of dovish comments from various BOE officials, they weighed on the pound confirming that for now the idea of rate hikes remains a very distant possibility.

In North America today the US has inflation data which is expected to rise from the negative reading the month prior but nevertheless remain near the 0% level and the report is unlikely to have much of an impact on trade. Instead the focus will shift north of the border where the BOC holds it monthly meeting. The market does not expect any changes in rate policy but traders will be looking for any shift in tone from the BOC chief Stephen Poloz given the improving string of Canadian economic data. If Mr. Poloz sounds a bit more upbeat about the prospects of Canadian economy the loonie could rally, especially against the euro as rate expectations between the two regions will likely widen.

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