Daily Market Report 05/02/2013

Risk appetite waned as political turmoil in Spain and Italy were the talk of yesterday with the euro weakening against all but one of its 16 major peers.

Spanish Prime Minister, Mariano Rajoy, faced calls to resign after allegations were made that he other senior officials of the ruling Popular Party had been receiving illicit payments over the last two decades. The alleged corruption seemed to dampen confidence as Spanish 10 year bond yields rose by 23 basis points to 5.45%.

In Italy, as former Prime Minister Silvio Berlusconi continues to gain ground in opinion polls, the prospect of a hung parliament, and a move away from the reforms implemented by Mario Monti's government, pushed Italian 10-year bonds up by 10 basis points this to 4.42%.

Economic data released did little to support the euro as the number of unemployed people in Spain in January rose by 2.7% to 132,055 and the euro zone producer price index fell shy of market expectations, staying at 2.1%.

Elsewhere, PMI construction in the UK remained at 48.7, just short of the expected 49.1. In the US, a report by the Census Bureau showed factory orders in December rose by 1.8% instead of the 2.2% that the market expected.

Overnight the Reserve Bank of Australian decided to keep interest rates at 3%, but did signal that the current inflation outlook would give scope for further easing and thus a potential rate cut.

Figures released this morning have shown that Markit Services PMI data came in better than expected in Spain, Germany and the euro zone.

It would seem that the political turmoil has provided an opportunity for investors to book profits following the euro’s impressive gains in the past month. With both the Bank of England and European Central Bank meetings scheduled for Thursday and the EU Summit at the end of the week, we could see yesterday’s risk-averse attitude continue until then.

Given the long term negative outlook for the pound, yesterday’s euro weakness and potential continued weakness leading up to the end of the week, provides those who may have a euro requirement soon an opportunity to lock in the rate before a potential resumption of the pounds downward trend.

Key Announcement:

9.28am – GBP – UK Markit Services PMI: Expected to rise to 49.5.

10.00am – EUR – Italian Consumer Price Index: Expected to decrease to 2.2%.

10.00am – EUR – Retail Sales: Expected to increase to -1.1%.

15.00pm – USD – ISM Non-Manufacturing PMI: Expected to drop to 55.8.