Daily Market Report 02/10/12

Yesterday belonged to the euro as sentiment improved demand for the single currency with markets positioning themselves following news of the Spanish budget and banking stress tests.

Optimistic that Europe is curbing the debt crisis, investors led a euro rally against almost all of its peers. Once again sentiment usurped raw data as manufacturing output contracted for the 14th consecutive month, albeit at a level marginally better than expected.

Gains in the euro were further enhanced following impressive data from the US’ equivalent manufacturing index, as the nation returned to expansion for the first time since May. Discontent with lower yields in the greenback, investors switched to the euro in order to reap the rewards of a risk-on currency.

The positive steps for the US show an improving economic health and evidence that the Fed’s continued stimulus is taking effect. If the data across the pond continues to improve, the euro could see further gains at the expense of the dollar.

These euro gains are not built on the quantifiable figures that illustrate strong economic foundations. Instead they are a result of heightened optimism that the currency will have the means to get back on course. Looking to the long term, even if the 17-nation euro zone does return to its former strengths, there is a profusion of obstacles that European leaders must successfully maneuver in the meantime, which are likely to weaken the currency in the coming months.

The frivolity of optimism could be exposed later today following Moody’s suggestion that Spanish banks require more capital than first reported. In these volatile times, breaking announcements can either eradicate or inflate market movements over short periods; perspicacious business owners strike on short-term movements with long-term trends in mind.

In breaking overnight news, the Reserve Bank of Australia surprised many in opting to reduce the overnight cash rate by 25 basis points to 3.25%. The Aussie showed early losses against its peers on the back of the decision designed to invigorate growth that has become very reliant on China’s construction industry.

 

Today’s Key Announcements:
  • 08.00am – EUR - Spanish Unemployment Change: increase to 79.6k from 38.2k
  • 09.30am – GBP – Construction PMI: Expected to increase to parity level, 50
  • 10.00am – EUR – Producer Price Index: marginal increase expected
  • Tentative – GBP – 10y Bond Auction

See previous Daily Market Reports