Risk Sentiment Improves on China Data, Italy Auction

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Market Drivers for July 13th, 2012
Chinese data at 3 year lows but comes in-line
Italian bond auction goes well despite Moody’s downgrade
Nikkei up 0.05% Europe up 0.57%
Oil at $86.70/bbl
Gold at $1578/oz.

Europe and Asia:
JPY Industrial Production -3.4% vs. -3.1%
CHF Producer and Import Prices -0.3% vs. -0.2%

North America:
USD PPI 8:30
USD U Mich Confidence 9:55

A very listless and quiet Friday the 13th in the currency markets today with risk FX getting a mild boost from in-line Chinese data and relatively strong Italian auction results despite a Moody’s downgrade, but the upside action was hardly robust and high beta currencies looked to simply stabilize their losses rather than start a significant rally.

In China economic data printed weak but was within market forecasts, spurring a small relief rally in risk in late Asian trade today. Chinese GDP came in line at 7.6%, Retail Sales were slightly better at 13.7% versus 13.5% while Industrial Production missed its mark at 9.5% versus 9.8% eyed. Overall this was the slowest pace of expansion in three years indicating a clear slowdown in growth in world’s second biggest economy. However, China Daily reported that officials expect growth to rebound to 8% in Q3 and 8.3% in Q4 reaching the key 8% target by end of the year.

Investors now expect a soft landing for the Chinese economy with PBOC anticipated to lower rates 2 or 3 times before the end of the year in order to stimulate demand, yet with Europe – China’s biggest export market – showing few signs of improvement the prospect of further contraction in Chinese rate of growth remains a very real possibility.

In Italy, the downgrade of Italian sovereign debt had little impact on the Italian Treasury auction today as the country was able to auction off 3 year debt at 4.65% versus 5.30% the period prior. Moody downgraded the country’s debt by two notches citing the contagion risks especially from Spain. Spain continued to exhibit funding problems with Spanish banks making up 30% of all borrowing at the ECB this week. Nevertheless, Italian officials objected strongly to the latest action by the ratings agency with Italian Treasury Secretary calling the action “entirely arbitrary”. The yield on the 10 year BTP eased from the key 6% level but remains elevated and is unlikely to see much improvement until EZ officials implement the ESM fund whose status is now in the hands of the German Constitutional Court.

With North American economic calendar relatively quiet save for the U of M consumer confidence report, attention will likely center on the JP Morgan earnings release and conference call as the company reveals the extent of its losses on bond derivatives trades. If the loss is less than $5 Billion it may prove positive for risk and help to extend the rally in high beta currencies as the day progresses. Given the extreme level of bearishness in the market, so improvement in tone and short covering is due, but the broader picture in the currency market remains highly negative towards risk.

Boris Schlossberg
Managing Director

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