The Euro rally makes no sense as markets are getting more unstable

August 7, 2014

So the Euro sold off into the 1.3330 region last night but rallied back to 1.3380 for what reason I can not fathom given the data flow last night out of the region.

Indeed German factory orders tanked 3.2% in June against the 1% rise expected. Italian GDP fell 0.2% in Q2 2014 when a rise was expected and UK manufacturing production was weaker than expected at +0.3% in June. Greek banks were sold off as were peripheral bonds and the Ukrainian tensions continue.

bond market ructions in Europe were also in evidence with a clear de-risking of portfolios with a big move Italy with 10′s up 16 basis points (capital loss of 6.19%!!!) to a still low 2.81% while Bunds rallied an enormous 7 points or 6.09% as traders clearly switch from the risky yield of Italy to the safe haven of Germany.

But the Euro rallied – what gives?

A technical rally within an overall down trend[/caption]

The rally isn’t sustainable so i’m looking to sell again after cutting my short overnight.

So at the close US markets recovered over the course of the day from the early European lead weakness. At the close the Dow was up 14 points to 16,443 for a rise of 0.08%. The Nasdaq was up just two points to 4,355 and the S&P was unchanged at 1,920.

European stocks were understandably weak given the above with the FTSE off 0.7% at 6,636, the DAX in Frankfurt fell 0.65% to 9,130 and the CAC dropped 0.61%. Spanish stocks dropped 1.04% but Italian stocks were poll axed after the GDP data falling 2.7%.

Locally the impact has been that the SPI 200 September futures contract has fallen 8 points to 5,447.

Respect the line until it breaks but I sense an eventual break[/caption]

– In Asia yesterday it was negativity all around with the Nikkei off 1.03% to 15,160 while stocks in Shanghai continued their reversal from the recent 1 year high falling back a little to 2,217 for a small loss of 0.13%. In Hing Kong stocks dipped back 0.26%.

On bond markets US 10 year Treasuries rallied to 2.43% before selling off to close down 2 points to 2.47%. One thing to note amidst the recent strength of US 10′s is the ANZ Macro Strategy team reckon US rates are on their way substantially higher. You should read this.

As noted above while these bond ructions were a result of the weak European data somehow the Euro managed to rally off its low for the day in the 1.3330 region and is back at 1.3380ish this morning. This US dollar weakness resulted in a bounce in the Aussie dollar which is back at 0.9350ish this morning. Sterling is down at 1.6954 and looking very wobbly while USDJPY fell to 102.10.

On commodities iron ore for September delivery was down 37 cents to $95.55 while Newcastle coal for the same data was unchanged at $70.85 tonne.

Elsewhere copper tanked back to 3.16 lb while gold rallied $20 oz to $1,306 on the rising uncertainty. Nymex crude continues to fall losing 54 cents to $96.84. On the Ags wheat rose 2.9%, corn was up 1.68% and soybeans 1.15%.

On the data front today we have employment in Australia with the market expecting a small rise of around 12,000 and an unemployment rate of 6%. Tonight we see industrial production in Germany, French trade and the huge ECB and BoE decisions – even though no one expects any material change from either central bank. Jobless claims are out in the US.

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