European Data Elicits Timid Euro Reaction

How Did the Markets React?

With a full plate of economic data on the agenda out of the Euro-zone, its no wonder market reaction was mixed today. The release of weaker-than-expected CPI normally elicits a stronger reaction, especially in the domestic currency, but today appeared to be a different story. Bonds, which initially dipped in reaction to dismal German retail sales of -1.7%, slowly returned to yesterday’s price and saw little change upon the CPI report. FX markets responded similarly, as EUR/USD dipped on the German data but proceeded to trade quietly thereafter. EUR/GBP, on the other hand, reacted more accordingly and gained on the sentiment reports, but eased on lower inflation. Meanwhile, German equities responded more to its national release, but shares merely marked time later on.

Bonds – 10 Year German Bunds

Fixed income markets in Europe saw minimal price action following yesterday’s gains, but 10-year German bunds slipped lower as the market opened on disappointing German retail sales. Bunds gradually picked up to yesterday’s prices, however, with the range holding within one basis point. The Euro-zone releases of CPI and industrial and consumer confidence had almost no effect on bunds, as the markets have already priced in a rate hike by the European Central Bank before year end. Additionally, traders likely feel little need to deviate from expectations amidst strongly worded hawkish commentary by European central bankers.

FX – EUR/USD, EUR/GBP

Similar to bond prices, Euro responded correctly and swiftly to the release of the German retail sales report, falling about 40 points over the course of an hour. Thereafter, however, EUR/USD retraced slightly higher towards the 1.2700 level, but paid little attention to CPI and sentiment reports. EUR/GBP, on the other hand, was a bit more lively and took all of today’s data into account, dipping on the bad German news, rising on the resilient industrial and consumer confidence, and easing on the reality of soft CPI. The anomaly comes as inflation reports are usually the center of attention for a domestic currency, especially against the greenback. However, the overwhelming hawkish rhetoric from the European Central Bank may be enough to keep traders placated and set for a rate hike before year end.

Equities – German Xetra DAX 100       

European equities furthered yesterday’s rally on signs that the European Central Bank may be forced to hold off on hiking rates for the time being, as German retail sales dropped and Euro-zone inflation slowed in October. The results indicate that consumption may not be holding up well in amidst higher interest rates, and with CPI well below the ECB’s inflation ceiling at 1.6%, conditions may not warrant additional monetary policy tightening. Meanwhile, improved industrial sentiment and steady consumer confidence, which could signal greater prosperity for German companies, likely gave share prices a boost as well.

Frankfurt’s Xetra Dax 100 gained 0.3% to 6,274.44 throughout the European morning as carmakers and mobile telecom groups rallied, while insurers made strong earnings-driven gains, countering losses from banks and drugs stocks. Leading the pack, Germany’s DaimlerChrysler gained on speculation it may sell its poorly-performing US Chrysler group, sending shares up 3.4% to 44.82 euros.