Rally in Risk Showing Signs of Exhaustion

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Market Drivers Jan. 18, 2013
Chinese data beats but profit taking kills risk rally
UK Retail sales miss
Nikkei 2.88% Europe 0.44%
Oil $95/bbl
Gold $1691/oz.

Europe and Asia:
JPY Industrial Production -1.4% vs. -1.7%
GBP Retail Sales -0.1% vs. 0.2%

North America:
USD U. of Michigan Confidence 9:55

Chinese economic data beat expectations prompting a small rally in risk in Asian trade, but the gains faded by morning European dealing as profit taking in the yen crosses sent majors lower. Chinese GDP printed at 7.9% versus 7.8% eyed while Industrial Production increased 10.3% versus 10.2% expected and Retail Sales expanded at 15.2% rate versus 15.0% projected.

Overall the numbers were slightly better than anticipated showing their first year on year growth since the fourth quarter of 2010. The news was not greatly surprising given the strong Trade data numbers last week. but the markets had clearly priced most of it in as the upside reaction was fairly muted. In fact, the Aussie which amongst the G-20 currencies is most sensitive to Chinese economic performance, weakened throughout the night hitting session lows below the 1.0500 barrier as profit taking overwhelmed the positive news.

The data out China did calm investor fears that the country has been able to avoid a hard landing, but the pace of improvement has been modest. Furthermore, the latest Chinese data, including the Trade figures has been mired in controversy with some investors questioning the veracity of the numbers, so today’s results may have been taken with some dose of scepticism by the the market.

Elsewhere, in UK the the Retail Sales numbers were considerably weaker than expected printing at -0.1% versus 0.2% eyed. This was the slowest pace of growth in more than a decade except for the snow interrupted season in 2010, confirming that final demand in UK remains tepid at best. Clothing and food sales were particularly hard hit while online retailers saw their sale expand.

The weak consumer spending numbers out of UK are just the latest evidence of stagnating economy that appears to be headed for its third round of quarterly contraction in the past five years. Investors are clearly concerned about UK economic prospects and cable has been relatively weak for the past several session of trade. The pair slipped through the psychologically key support level of 1.6000 yesterday and was approaching the 1.5900 barrier in today’s trade as liquidation continued.

With little economic data on tap and European traders in a relatively somber mood on the final trading day of the week, the direction of risk FX will likely be determined by North American flows. The US calendar is also relatively barren, but today U of M Consumer sentiment survey could set the tone for the rest of the day. Markets are looking for a strong rebound to 75.1 from last months 72.9 print. If the numbers meet or beat expectations they will provide yet another catalyst to push risk assets higher and perhaps push USD/JPY to fresh yearly highs. However, with the rally in risk clearly extended, any miss in the data could prove to be the perfect excuse for further profit taking.

The recent rally in risk has been driven by the assumption that global growth led by US, will continue to recover at a solid pace. However, if the US consumer sentiment begins to wobble, that thesis could come under review and send risk FX tumbling as the day proceeds.

Boris Schlossberg
Managing Director

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