Overnight Europe-Open Levitation Returns

Just when one thought the old overnight futures levitation on a surging EURUSD regime was over, and was replaced by some semblance of normalcy, here comes Europe, sending the EURUSD screeching higher by some 100 pips from a support threatening 1.3460 on no news, with absolutely nothing changed, and pushing US futures to virtually unchanged from yesterday morning wiping out the entire day's losses in 3 short hours of near-zero volume overnight trading.

On the chart below spot the moment Europe opens: apparently the mere fact of Europe opening is now fundamentally strong news.

What little news there was was decided mixed. Initially PIIGS bonds resumed sliding, but retraced following Spain's January Services PMI which printed at 47, spiking from December's 44.3, even as the Employment PMI plunged to 42.0, the lowest since January 2012. How the economy's services are faring better when there is no economy to speak of is perhaps best answered by Argentina's set of economic data metrics.

Then we got Italian Services PMI, which in turn was far worse than expected and the prior number, or 43.9, vs Exp. of 45.8 and 45.6 last, a French Services PMI which was unchanged and in line with expectations, and a German PMI just inching above expectations, from 55.3 which was also the expected print, higher to 55.7, resulting in a blended European Services PMI of 48.6, vd the 48.3 expected, or a 10 month high. Naturally, this number is unsustainable with the EURUSD this high, but that takes us back to the much discussed economic chicken or redenominated currency egg problem at the heart of the Eurozone so we won't spend more time on it.

But perhaps the most indicative number of what is really happening was the European retail sales number which too missed expectations, declining -0.8%, below the -0.5% expected, and down from a downward revised -0.1%.

In a nutshell: this is what passes for a good day in Europe. In the meantime, the political scandal scene in both Italy and Spain is unchanged, and getting worse, especially with Rajoy summarizing it all with this absolute pearl according to El Pais: Rajoy Says ‘"It’s All Untrue, Except Some of It." No seriously, he said that.

As for the getting worse part, according to a La7 poll, the block of frontrunner Bersani is now losing ground before Italy's vote in two weeks, while Hollande made demands to have an exchange-rate policy and that it was not all up to the ECB to set rates. So French socialists must see the EURUSD rate too then?

Some additional comments from sellsiders on the ongoing fiasco in Europe via Bloomberg:

BNP Paribas:

  • EUR correction in full swing as Spanish and Italian headlines adding upward pressure on euro-zone risk premium: note to clients
  • Spanish bond auction need to get decent result to ease bond market tensions
  • BNP still sees Italy’s center-left as likely winner of lower house
  • EUR correction shouldn’t surprise as much of good news already priced in; however, a broad range of investors are still underweight EUR and will be tempted to buy dips


  • Correction can continue until ECB’s meeting on Thursday although Spanish and Italian political concerns seem unlikely to be the catalyst for a real turn in trend, Kit Juckes, strategist at SocGen, writes in note
  • Too soon for bears to come out in earnest


  • Next big test for peripheral sentiment is Spanish auctions on Thursday; shift in investor mood recently may result in weaker demand for bonos, Valentin Marinov, strategist at Citigroup, writes in note
  • Downside risk for EUR/GBP could grow on renewed widening of peripheral bond yield spreads; concerns about hung Italian parliament and reform process after elections could prompt more profit-taking in periphery
  • Indications on Thursday that demand for SPGBs may be weakening, due in part to larger than expected LTRO repayments, could also push Spanish yields higher and EUR
  • EUR/GBP could drop towards 0.85 near term, though move will be viewed as tactical correction; longer term risks are still to upside


  • Berlusconi win in vote may not prompt Italy aid
  • All sides would have interests in managing possible fallout

A recap of key FX events from SocGen:

Contagion made a brief comeback in Europe yesterday as markets wonder what to make of political developments in Madrid and whether plummeting Italian markets are a sign of investors deserting local securities before the election. Unless a change of the guard takes place and puts government reforms on shaky ground, this should prove not more than a bump in the road. However the reaction has made for some pretty compelling viewing as three days have been enough to unwind virtually all of the tightening in the 2y bono/bund spread of January. Profit taking in stocks was overdue some will argue after an unbroken eight-month winning streak, especially when the last leg up was accompanied by lower volumes. A market that was technically on the cusp of being overbought last week has gone into mean reversion mode, something that has not yet fully come to fruition in EUR/G10 crosses though we have taken a first step. Does this all of a sudden turn the EUR into a sell on rallies? It is unclear down which path the allegations of corruption against Mr Rajoy will take us, but the level of spread widening was certainly persuasive enough for some to take a defensive stance. An 3-big figure move is standard procedure if retracements of last September, October and December are any guide. With fresh Spanish supply coming on Thursday, this could be the way forward until then, with 400bp an obvious key target for the 10y spread over bunds. Prior to yesterday, the 15d rolling correlation of EUR/USD with the S&P 500 was 0.79 and with the 2y bono/bund spread it stood at -0.52. The EU services PMI (final data) should not make a big difference and will only serve to reaffirm the divergences in the euro area, something that will certainly spring up during the ECB's Q&A on Thursday

In the US the only release likely to retain market participants' attention will be the Non-manufacturing ISM report.


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