Daily Market Report 03/10/2013

What a difference a day makes. 24 hours ago the risks of the euro weakening further was heightened but positive developments from Italy and Mario Draghi’s press conference seems to have alleviated that and actually strengthened the euro.

Enrico Letta stormed to victory in the confidence votes in the Senate yesterday with 235 votes in support and 70 against. It was s surprise U-turn by Berlusconi’s People of Freedom (PdL) party, who were pulled out of the government only just last week. Letta’s confidence vote should allow the necessary budget reforms to take place.
The ECB unsurprisingly held interest rates at 0.5% and Mario Draghi once again reiterated that risks to the euro zone remained on the downside adding that the recovery “weak, fragile and uneven” and also reiterated that bank rates would remain at current or lower levels for an “extended period of time”. So no change there then and whilst the ECB remains ready to implement the Long Term Refinancing Operation for a third time, it appears from Draghi’s comments that this action would not be imminent. As a result, given that the negative factors for the euro have been alleviated, we would expect in the short term at least the euro to regain some ground and strengthen.

In other news, UK construction grew further for a fifth month in a row albeit at a slightly lower pace in September. This seemed to disappoint markets initially but the pound managed to regain ground as the day progressed as the data still shows that the economy is recovering.

Mark Carney issued a warning to prospective house buyers that interest rates will rise once the recovery takes hold. This was a bit of a surprise, given Carney’s recent attempts to talk down the possibility of a rise in interest rates before the Bank of England three year target.

The US dollar lost some demand yesterday after payroll processing firm ADP revealed that US non-farm private employment only rose by 166,000 in September instead of 180,000. With concerns that the official non-farm payroll figures won’t be released tomorrow because of the shutdown, means that the ADP figures were in the limelight more than usual and thus indicating once again that the Fed are more likely to persevere with their monetary stimulus programme.

There were still no developments in the US yesterday as Obama once again stated that he would be unwilling to negotiate with the Republicans until they raise the borrowing limit without any conditions

Overnight, data revealed that China’s service sector expanded to its highest in six months. This would usually provide a risk-on attitude amongst investors but it is quite clear to see that isn’t evident in the markets given the situation in the US. Also euro zone and UK services grew further in September.

Key Announcements:

10.00am – EUR – Retail Sales (Aug): Expected to fall further by 1.5%.

13.30pm – USD – Initial Jobless Claims: 313,000 people filed for jobless claims.

15.00pm – USD – ISM Non-Manufacturing PMI (Sep): Expected to fall to 57.4