May 18th 2009, Lack Of Confidence Makes A Return

Sentiment took a turn on Friday and witnessed risk aversion seeping back into the market, which added vigor to the USD particularly against the EUR. While economic data from the U.S. turned in mixed numbers on Friday, it was the combination of the previous negative reports from Retail and weekly Unemployment Claims and bad GDP news from Europe which spooked the market. Equity markets continued their decline on Friday and it appears that the footing in global stock markets may remain unsure this week. The USD was a benefactor from the lack of confidence and has positioned itself � particularly against the EUR � for an interesting test of its range in the coming days. The Empire State Manufacturing Index turned in a reading of minus -4.6, an improvement on the estimate of minus -12.1. The University of Michigan also brought forth a slightly positive number with an outcome of 67.9, above the forecast of 66.9. Core CPI data came in slightly higher than expectations but the figures still show little risk of inflation. However, the above numbers did not bring out the bulls.
There will be little in the way of data from the U.S. today but investors will have their hands full watching the results from Wall Street. Perspectives appear to be on a razor�s edge and after a month of steady gains in equities, pressure has seemingly arrived from a rather strong group of bears. Tomorrow Building Permits and Housing Starts data will be published. These numbers will spur on perceptions and the growing rancor between those who are trying to talk up stability in the marketplace and those who are continuing to express concerns about the prospects of future growth. The difference in opinions between those partaking in the market are setting the stage for what could turn out to be a hectic week of trading on many fronts and bring volatility into the currency markets, specifically for the USD.

GDP Prelim reports from across Europe brought discouraging data on Friday, led by the sharp decline in Germany. While the French number nearly met expectations head on, the German figure provided investors a surprise with a drop of -3.8% compared to the already uninspiring forecast of minus -3.0%. The Italians followed this up with a rather terrible result too. Europe will publish its Trade Balance data today and an outcome of minus -3.8 billion is estimated. Tomorrow the important German ZEW Economic Sentiment numbers are due as well as the numbers from the broad European Union. The question for EUR investors right now is whether or not Friday�s GDP reports are a game changer? The European governments have collectively been trying to remain optimistic with their growth forecasts and exude the mood that they have the economic crisis under control. However the distressing statistics provided by Germany, the biggest engine in the EU, will ring alarm bells in some quarters. The ECB remained stubbornly resistant to aggressive interest rate cuts in direct contrast to their counterparts. There remains a problem with transparency and a real cohesive plan from the member countries making up the European Union in order to confront the recession. Investors will be keen for developing news from the corporate front this week in Europe and will examine all economic releases carefully. Expect to see the EUR be in the cross hairs of sentiment this week and be pressured.
The news dominating the U.K. on Friday continued to be the political problems that have grown into a national scandal regarding the expenses of Parliamentary members. On the heels of this chaos finding a large sounding board among the British daily newspapers, the Sterling has remained within the high end of its range. There was no major economic news from the U.K. on Friday and there will be none today. Instead the growing chorus for new elections in the U.K. will continue to probably gain momentum and get the attention of some investors. With all of the troubles on the U.K. economic front, this political firestorm may not go down particularly well with investors who are already skittish. Inflation data will be published from the U.K. tomorrow and be followed on Wednesday by CBI Industrial Order Expectations. The Sterling finds itself in a position in which it has maintained a consolidated range the past week. Will the political fallout in the U.K. be enough to cause a reaction within the GBP?

The JPY continued its strong surge on Friday gaining across the board as it clearly has become a focal point for risk aversion. International equity markets continued their slump on Friday and this has put the Japanese currency in the precarious position of being the strongest of the major currencies even though it is clear that the Bank of Japan is dead set against this. Japanese export companies have continued to report dramatically poor quarterly earnings. If the JPY continues its strong pace this could have a terrible affect on the Japanese economy, making the impact from the recession far worse. Gold continues to also be a benefactor from a cautious investor environment as it has gone past the 930.00 USD plateau.

Written by: Robert Petrucci
Bforex Chief Commodity Expert and Forex Analyst