How Did the Markets
React?
This morning the European FX and
equities markets made it very clear that they weren’t paying any heed to
Euro-zone economic data, as traders were focused on everything from the mid-term
elections in the US to strong earnings in Europe. Fixed income markets had mixed reactions to
Euro-zone data, but focused more on retail sales, which plunged 0.6% in the
month of September, bringing the annual rate down to 1.4%. The contraction in
sales was more than the expected slip of 0.4%, and was led by a decline in
non-food products, such as clothing and footwear. Today’s result highlighted the
unwillingness to spend in the Euro-zone, despite a tight labor market and
optimistic sentiment. However, retail spending data could see an improvement
next month, as retail PMI showed a surge in annualized sales during
October.
Bonds – German 10-Year Bunds
European
fixed income markets worked their way higher this morning, with prices reaching
a session high of 102.260 and yields down two basis points to 3.742%. The move was “correct” in relation to the dismal
Euro-zone retail sales report, which highlighted the unwillingness to
spend in the Euro-zone, despite a tight labor market and optimistic sentiment.
Bund appreciation would indicate that traders are pricing in lower probabilities
of monetary policy tightening beyond December, as weaker economic data would
warrant more accommodative policy. However, Bund price action in relation to
Euro-zone retail PMI was “incorrect”, as the index indicated that later reports
of retail sales will likely surge higher.
FX –
EUR/USD
While price action in the EUR/USD
pair was technically “correct” for both Euro-zone retail PMI and retail sales,
the 10 point changes upon the releases were merely a blip on the charts as the
central focus of today is on the greenback side. Today is just another example
of political events trumping fundamentals, as mid-term elections are in process
in the US, and major speculation is being
played out as to whether the Democrats will take back Congress. Back in
Europe, however, the brief gain in the euro at
9:00GMT followed stronger Euro-zone retail PMI, which showed that sales versus a
year ago in October surged higher. Euro subsequently eased back at 10:00GMT as
retail sales in the Euro-zone plunged 0.6% in the month of September, bringing
the annual rate down to 1.4%. The contraction in sales was more than the
expected slip of 0.4%, and highlighted the unwillingness to spend in the
economy, despite a tight labor market and optimistic sentiment.
Equities – Xetra
DAX 100
Index
European equity markets hit fresh
five-year highs today led by oil stocks, bank, and gains were in line with a
strong showing in US markets, as traders there price in the possibility of
Democrats winning the House, which would create a legislative “gridlock”
situation. Historically, years in which the House and Senate are split between
Republicans and Democrats are more profitable for the Dow. Back in Europe, the German Xetra 100 topped out at 6354.27 but
subsequently eased back to 6,345.16, which was still 0.2% higher on the day.
Financial stocks were lifted by solid results from Deutsche Postbank,
Germany’s biggest retail bank. The
company said its third-quarter net profit rose 16.7 percent, as interest income
climbed nearly 14 percent. Given the positive factors for shares in
Germany, there is little indication
that equity markets even noticed economic data out of the
Euro-zone.
