Consolidation in FX, Gains in Equities

The US dollar is mixed in choppy trading as yesterday’s sharp moves are consolidated. The shallowness of the euro’s pullback suggests continued position squaring may be taking place. Some short-term momentum players may be playing from the long side, and there is talk of short dated euro calls being bought. Sterling is underperforming following the much weaker than expected manufacturing data after recording new six day highs.

Rising equity prices, fairly robust data from Japan, China, Australia, New Zealand, India and Sweden over the last couple of sessions, coupled with the ECB revising up this year’s growth forecasts for the region and the Bundesbank revising up German growth and the ECB’s promise of unlimited liquidity over the next three months has helped ease investor anxiety and bolstered the appetite for risk.

Global equities are recovering. The MSCI Asia-Pacific Index rose 1.3%, helped by the second consecutive 1%+ rally in the Nikkei. The technology sector was particularly strong with positive comments from a couple of Taiwanese computer companies and news from the Semiconductor Industry Association raising this year’s forecast for microchip demand to 28% from its 10% forecast last November. European bourses are participating too. Of note, despite the FT Deutschland report claiming that the EU is preparing for a Greek-style crisis in Spain (and an official Spanish denial), Spanish equities have rallied 4.5% led by an almost 7% gain in the financial sector. Financials are doing well throughout Europe. It is the second best performing sector in the Dow Jones Stoxx 600, behind oil and gas.

Debt markets are subdued, though with the gains in the equity markets a downside bias is evident in Japan and Europe. There is a large German bond redemption (8 bln euros) and coupon payment (1 bln euros) today and it does not seem that the Italian bond sales was a good alternative for the freed up funds. The Italy was able to raise the full 7 bln euros it was looking for, but demand was mediocre at best with the new 3% June 2015 BTP seeing a 1.27 bid-to-cover. The two off-the-run issues (re-opening) saw slightly better reception, but not impressive.