PIIGS Credit Spreads ticking higher. Draghi in focus on Monday
US stock markets closed for the second week in positive on back of positive retail sales and housing starts, but dipped lower ahead of the weekend with healthcare and consumer non-cyclicals leading the losses. A positive move in oil prices took energy-related shares higher, but not enough to turn the overall indices positive. Europe close in negative for the week and on Friday with the central European indices down around 0.3%, while peripheral indices fell more than 1%.
FX markets saw the US Dollar advancing with the US Dollar Index up 0.3% on Friday reaching highest levels since April 2003 post the Trump winning the US election.
US Dollar Index (Source: Reuters)
It is worth noting that US yields have increased as the dollar and US equities have advanced on back of an increase in growth expectations, but also because of the increased uncertainty, as investors want a higher premium for investing in US assets, which also has driven yields higher. EURUSD is at its lowest level since December 2015 with support at 1.0540 before 1.0520 and then 2015 lows at 1.0465.
EURUSD vs. US10Yrs (Source: Reuters)
This week has started on a positive note with positive mood from Asia with the Nikkei up 0.8% on back of good Japanese figures as the Adjusted Trade Balance showed better than expected figures and the All Industries Activity Index came higher than expected. Despite disappointing New Zealand Core Retail Sales, the overall positive mood has spilled into Europe, where indices generally are in the green. The Italian FTSEMIB is down 0.6% at time of writing on back of concerns about the upcoming Italian referendum. The concern about peripheral Europe is visible in the credit spreads as seen on the chart below, where Ireland, Italy, Portugal and Spain are compared the 10yr EU benchmark bond – the German bund. (Greece is not included as the chart would be considered an outlier and make the development less clear). The US Dollar has made a slight pull-back so far on Monday, but this could be short term correction following the steep incline post the Trump victory.
PIIS 10yr spread vs Bunds (Source: Reuters)
Today, we have little macro data of importance, so markets will tune in to comments by ECB President Mario Draghi, who is scheduled to participate in the plenary discussion about the ECB Annual Report 2015 at 1715CET in the European Parliament. We do not expect any major moves in the market on back of this, but any hints on future monetary policy should be noted.
Looking ahead in the week, we have a few things on the agenda which could trigger some market action. The US will release Existing Home Sales on Tuesday and New Home Sales as well as the FOMC minutes from the October meeting on Wednesday. US markets will close early on Thursday for Thanksgiving. From the Euro zone, PMI figures on Wednesday will be interesting as well as the German IFO index on Thursday. On Friday, the UK will be in focus as the Q3 GDP will be released.
As we get closer to the Italian referendum as well as the Austrian Presidential Election in December, we could see further deterioration of peripheral European credit spreads, which could hurt the Euro even further. Hence, we could see some correction in EURJPY although the technical outlook is bullish as long as we trade above 115.3-area.
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