Risk sentiment is dropping, starting with the Asian session after Fitch comments suggesting that the sovereign debt crisis is likely to spread to more countries and that it has the potential to lead to credit downgrades for banks in the United States. The only positive in the statement was the assertion that US banks have reduced their exposure to troubled European assets. Either way, the comments wound up being the driving factor on the day as even the strong Industrial Production number out of the US could do nothing to change price trajectory.
The macro data should be given attention, however, even if markets are not putting most of the focus there in the short term. Inflation in the US came in at an elevated 3.5% for the headline figure but the core figure showed more evidence of price stability. Treasury inflows also beat market expectations but matched our estimates mentioned yesterday, which were based on the recent strength seen in the US Dollar. Today, the macro calendar is much lighter and there are no scheduled monetary policy meetings, so we could see some consolidation of yesterday’s declines (i.e. a decrease in price volatility).
One potential point of activity could come from the Treasury bond auctions that will take place in Europe, so any news flows from this could be paid attention. In Italy, Mario Monti assumed his new position as prime minister (backed by a technocrat cabinet) and markets will be watching his comments closely to gauge his plans to solve Italy’s debt issues and the probability of achieving political majorities in what could be described as a fractured government. Ranges in the EUR/USD have moved down to 1.3420-1.3480 while the USD/JPY remains heavy at 76.90-77.10.
In the UK, the Bank of England released the quarterly inflation report, with both CPI and GDP estimates being revised lower. The statement was no surprise with respect to inflation but the growth estimates were in fact lower than most analysts were expecting. The debt crisis in the Eurozone was cited as the area creating the greatest potential risk.
The report shows consumer inflation dropping below 2% in 2013, and if this is actually the case, analysts will start to expect increases in the BoE’s current asset purchase program (but this would also depend on continued weakness in the Eurozone). Jobs data came in mixed, with monthly claims rising by 5,300 (lower than the 21,000 consensus) while claimant count rate dropped one tick to 5.0%. The ILO unemployment rate was the negative in the reports, showing an increase to 8.3%.
The EUR/USD is looking very heavy on the short term charts. The main support area to watch comes in at 1.3430 but we need to see a daily close below there before losses are expected to accelerate. Choppy trading is likely to continue but the bias is clearly bearish. Sell rallies.
The S&P 500 is forming a symmetrical triangle and we will need to see a clear break of this to determine medium term direction. It does look as though the break will come to the downside as the momentum indicator is bearish and crossing into negative territory. Support seen at 1226.