Eco Events Control Risk On Rally

By FX Empire Analyst - Barry Norman
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Eco Events Control Risk On Rally

Eco Events Control Risk On Rally

As the Greek saga continues yesterday, a government spokesman said before a meeting between PM Samaras and coalition partners Venizelos and Kouvelis that a deal would be reached. However, these hopes got a set-back when Kouvelis said after the meeting that some of the structural reforms the Troika demands are unacceptable. Venizelos also expressed reluctance. Talks will continue and Samaras still hopes to reach a deal by Friday in a bid to secure the necessary funds to keep the government operational. With Greece what the government says, does and promises seems to have flexible interpretations. So why all the difficulties, they should simply agree, take the money and then ignore the troika's demands, it would not be the first time.

As we move towards the end of the week the eco calendar heats up, especially in the eurozone with the first estimate of the October PMI’s, the Q2 government debt statistics and the German IFO. Also 3rd quarter GDP in the UK and let's not ignore, Chinese Flash PMI this morning, which reported better than the previous months but still below the all important 50 number, today's print was at 49.1% a respectable increase. In the US, the new home sales will be released and the FOMC will announce its policy decisions. ECB’s Draghi briefs German lawmakers.  This month, the PMI indices are forecast to stick close to each other as the consensus is looking for an increase to 46.5 for the manufacturing PMI and to 46.4 for the services PMI. The manufacturing PMI increased already for two consecutive months and a further improvement might be an indication that the trend has changed.  Nevertheless, after the poor French and Belgian business confidence indicators yesterday, look for a poor outcome. The index for the services sector fell last month to its lowest level since 2009.

The German IFO business climate indicator extended its downtrend in September led by weakness in expectations. In October however, the headline IFO indicator is forecast to show the first improvement in seven months, although a very mild one (from 101.4 to 101.6).

 In the US, new home sales are forecast to show an increase in September after new home sales dropped slightly in August. New home sales are expected to have risen by 3.2% M/M to a total level of 385 000, which if confirmed would be the highest level since 2010. Traders are hoping for a positive surprise as sentiment in the sector remains strong, lending conditions remain favorable and also the weather was supportive. Leading indicators also support a higher than forecast outcome.

Markets are clearly at crossroads. The risk-on sentiment is now about three months the dominating trading factor and has lifted riskier assets substantially. So, much start to question the durability of the rally, which led to increased volatility in recent days. It seems that especially on the equity market, which had reached quite lofty levels in the US (and Germany), doubts have arisen. Earnings results clearly disappoint and seem to be the biggest driver in recent days. Yesterday, attention, besides on the earnings went to the very weak French and Belgian business sentiment, which suggest that the EMU wide business sentiment measures, to be released today, may disappoint too.

The lack of growth in Europe is, of course, still worse than elsewhere as it prevents the peripheral markets to improve rapidly and sustainably their budget and debt situation. Yesterday markets saw gold and silver tumble, crude oil collapse, the EUR/USD dip below the 1.30 level and the USD/GBP under 1.60 once again.

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