EURUSD – ECB warning, market not convinced

The ECB’s monthly bulletin usually doesn’t attract a lot of attention. Yesterday, however it was the main market driver during the European trade as the Bank warned that forcing private creditors to accept large losses on the Greek debt could have a severe impact on the banking sector and consequently on the economy. The ECB was reluctant to accept even a previous solution (agreed in July) but since unsustainability of the Greek debt is certain someone needs to take losses. However, a voice from ECB may suggest there is a deep row on this issue despite reassurances from Merkel and Sarkozy last Sunday.

Despite those warnings and rating cuts from Fitch (UK banks) and S&P (Spain) the EURUSD stays close to 1,38. We had a hung-man candle yesterday on a daily but only a second straight candle signaling indecisiveness could prompt a sell-off on the pair.

Equity markets – Google’s results and the US data

Google surprised markets yesterday by posting EPS as high as 9,72 USD (it was expected at 8,74 USD) on revenues of 7,5 bln USD (7,2 bln USD). The company improved moods among investors after Alcoa and JP Morgan disappointed. The US data wasn’t bad either. Exports declined by a mere 0,1% m/m after increasing by 3,4% m/m in July and it was still +14,7% y/y. Imports was weaker declining for the third month in a row (albeit by a very tiny amount) and with the 11,4% y/y being the lowest since Dec’09. Initial claims were again close to 400k – that is a level where you cannot expect an unemployment rate to decline but on the other hand it means companies are not in a rush to lay off workers.

That all is positive for equity markets but the question is where we are at the moment. The S&P500 and other key indices rallied strongly since last Tuesday and a room for this rally to continue seems to be very limited. That would only change should a) investors see some clear-cut solutions in Europe and/or b) become convinced that the momentum in economic cycle is shifting from a slowdown to some kind of recovery. For now there is little evidence in both cases.

Przemysław Kwiecień PhD, Chief Economist

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