Chinese data disappointed

Trade surplus in China increased in May to 13,5 bln USD from 11,4 bln USD in April but fell short of 18,6 bln USD expected as exports rose way slower than a month ago (19,4% y/y vs 29,9% in April) and imports rose by 28,4%. The data seem to confirm a slowdown already shown by the PMI and thus suggest that a tighter policy in China might have impacted growth. If it impacted inflation as well, investors will now next week when the CPI is released. So far the data joins a growing avalanche of the bad news hitting the markets as of late.

EURUSD – Trichet suggests a hike

The ECB didn’t increase interest rates yesterday – as expected, and JC Trichet suggested a hike in July (by using a phrase “strong vigilance”) – as expected as well. Nevertheless, the euro tumbled following the Conference.

Why did that happen? One needs to realize that expectations regarding hikes in the zone for 2011 aer already consumed by the market (fully pricing another two moves this year) and are unlikely to push the euro higher. The game is about 2012 and actually things aren’t looking so supportive for the euro here: within last few weeks expectations (for hikes in 2012) moderated by some 50 bp! Things weren’t helped by Trichet suggesting the growth might be in jeopardy due to elevated commodity prices.

With ’11 hikes already consumed and Greece moving to the second plan (at least from the FX point of view, a view that we’ll have no restructuring for now and necessary funds provided) one needs to look at other factors. Those include a general market sentiment and related flows to safety. The longer this correction is going to last, the more euro (and other European currencies) might lose against the dollar, especially if commodities join equities as well. A key support and a possible short-term target for the EURUSD is 1,4345.

DAX30 – bulls defend a support zone

Yesterday’s rebound on equity markets wasn’t driven by a single particular factor. Actually, the news was mostly grim – another poor labor market report from US, higher projected deficits on grain markets (by USDA) etc. However, for markets in Europe even this kind of a rebound might be meaningful. It helped the DAX30 futures to (once again) defend the key 7000-7100 support zone and despite a weak session in Asia, Friday’s opening offers a hope for at least a neutral finish of the week and a slight hope for a continuation of a rebound. That doesn’t change our mid-term view: we still do not see a reason for optimism until a) data prove the soft-patch is over or b) commodity prices adjust to deteriorated fundamental picture, offering the economy some boost.

Events to watch – figures from UK, labor market in Canada

Investors would probably love to know the Chinese CPI and retail sales and output from the US but those numbers will arrive next week. Friday’s calendar is lighter with the output (consensus 0% m/m) and PPI (consensus 5,3% y/y) data from UK at 10.30 CET (4.30 ET). There is also a payrolls report in
Canada (7.00 ET, 13.00 CET, consensus +20k) and import prices in US (8.30 ET, 14.30 CET).      

Przemysław Kwiecień PhD, Chief Economist

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