The battered euro remained under heavy pressure versus the dollar and yen on Friday, hitting a fresh 8-month low against the greenback amid lingering concerns about sovereign debt and the health of the global economy.
A murky report on the US jobs situation failed to stop the surging dollar in its tracks. Traders have sold off the euro due to deepening fears that debt crises now plaguing Greece, Portugal, and Spain could spread, derailing the already sluggish EU recovery.
The US economy shed an additional 20,000 jobs in January, with employment in the construction industry showing a notable decrease. However, the report also showed a surprise drop in the unemployment rate to 9.7%.
Traders failed to make much sense of the report, generating additional risk aversion and further interest in the low-yielding dollar and yen.
The euro dropped to 1.3650 versus the greenback, extending its lowest levels since last May. A brutal stretch has seen the euro pair more than 15 cents from its November highs.
The euro also continued to decline versus the yen, hitting a new 11-month low near 121.50.
Meanwhile, the euro extended its run of choppy trading versus the sterling, which has also become unfashionable over the past few weeks. The pair was bouncing back and forth near .8720 on Friday.
Thursday, the European Central Bank and Bank of England both held steady on respective interest rates, but policy makers in the UK halted their quantitative easing program.
U.S. stocks rose, with the Dow Jones Industrial Average erasing a 167-point drop in the final hour of trading, on speculation the European Union may propose a solution for Greece’s budget deficit. Oil, gold and copper rebounded, and the dollar pared its gain.
The Dow rose 10.05 points to 10,012.23 at 4 p.m. in New York, and the Standard & Poor’s 500 Index rallied 0.3 percent after plunging 1.8 percent in what would have been the biggest two-day slump since March.
The MSCI World Index cut its drop in half to 1 percent because of the recovery in U.S. stocks.
Oil pared its loss to 1.8 percent and gold and copper climbed at least 0.3 percent in electronic trading after the close of commodities exchanges.
The U.S. Dollar Index gained 0.5 percent.
Stocks and commodities had plunged around the world earlier on growing concern European nations will default on their debt.
The recovery by U.S. equities showed confidence among investors that a solution will be reached in Europe.
The retreat in American shares had been limited after the nation’s jobless rate unexpectedly fell to a five-month low of 9.7 percent.
The markets across Asia plunged sharply on Friday amid concerns about global economic recovery.
The weak closing on Wall Street and the European markets in the previous session amid concerns about sovereign credit worries in Greece, Spain and Portugal and weaker than expected weekly jobless claims weighed on sentiment.
In Japan, the benchmark Nikkei 225 Index at 10,057.09, down 298.89 points or 2.89%,. while the broader Topix index of all First Section issues lost 19.31 points, or 2.12%, to 892.
On the economic front, a preliminary report released by the Cabinet Office revealed that Japan’s leading index strengthened for the tenth consecutive month in December at 94, higher than the reading of 91 reported for November. Analysts expected the index at 93.5 for the month.
The report further revealed that as of January 31, foreign currency reserves amounted to $1.001 trillion, while reserves with the International Monetary Fund stood at $4.27 billion.
Gold reserves totaled $26.53 billion, while SDRs were worth $20.79 billion.
Sharp decline in US and European markets in the previous session following weaker than expected jobless claims in the US and sovereign debt concerns in Greece dragged the market sharply lower.
The strengthening of the local currency, Japanese Yen, against the dollar as traders shunned risk aversion also impacted market sentiment.
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The January nonfarm payrolls report proved a mixed bag of news. Although the negative -20k NFP headline and past revisions to employment signal a weaker level of labour activity, the detail of the report, including the unemployment rate, manufacturing and services payrolls, hours worked and earnings, indicated a more positive momentum in labor conditions at the start of the year.
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Given that equity market futures have stabilized after the release, investors are choosing to focus on the positive short-term cyclical trend reflected in the data rather than the implications from the BLS sharp negative historical revisions to payroll employment, which stands 1.363m below initial estimates.
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From the Fed’s perspective, the labour figures signal a high level of spare capacity in the economy resulting from ongoing weakness in activity which will maintain downside risks to medium-term inflation. The January unemployment rate at 9.7% came in below expectations but it remains considerably above the 4.9% average for the decade prior to the crisis. The improvement in short-term demand for labour, resulting from the pick-up in investment and trade activity at the turn of the year, argues against further policy easing. However increased uncertainty about the sustainability of the positive momentum in the economy given renewed financial stresses at the start of the year indicates that the Fed is unlikely to be in a hurry to withdraw stimulus.
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The implied rate on the Dec’10 Fed fund rate contract has fallen to 0.54% from 1.0% at the start of the year, in line with our bullish call for 2010 rate contracts dating back to early 2009. Directionally, the renewed deleveraging/de-risking trade signals continued positive directional momentum for rate futures on the flight to liquidity in the short term. However renewed asset volatility and the potential increase in credit spreads resulting from escalating fiscal stresses in Europe and the end of Fed asset purchases suggest that the risks to money market rates are to the upside, even though we see a very low chance of Fed tightening this year.
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Lower market liquidity, rising volatility and reduced investor risk tolerance are consistent with continued US dollar strength. At current valuations one see relatively better value in the downside for GBP/USD than EUR/USD.
January NFPs Report:
Headline payrolls fell 20k in January, defying expectations of a small increase, but the unemployment rate also fell to 9.7% from 10% in December and 10% expected. The January decline followed a downwardly revised 150k decline in December versus a -85k drop reported initially, but November’s positive reading saw a similarly sized revision in the opposite direction, as it was revised strongly up to 64k versus +4k reported before.
Aggregate hours worked rose 0.3% in January, a second increase in three months, reflecting gains across the private services sector (+0.4%) as well as the goods-producing industries (+0.3%). Hourly earnings came in stronger on the month, rising 0.3% versus 0.2% expected. Both the hours worked and earnings signal an underlying improvement in demand for labour, albeit from weak conditions, driven by the recovery in investment and output.
The BLS also revised the historical series since January 2005 which now shows sharply lower levels of payroll employment. The decline in payroll employment since the recession started in Dec’07 has actually been 1.2m greater than initially reported, which amounts to the bulk of the total downward revision of 1.363m.
However this had no impact on the unemployment rate, with the current peak of 10.1% dating back to October. On the BLS household survey, the number of employed persons in January rose 541k from December. The size of the labor force increased by 111k and the number of unemployed dropped 430k, which led to a 0.3ppt drop in the rate of unemployment to 9.7%, the lowest since a matching reading in August. The broad measure of unemployment, which includes discouraged, marginally attached and part-time workers for economic reasons, fell to 16.5% versus 17.3% in December and a recent high of 17.4% in October.
The sector detail of the report showed improvement in underlying labour demand conditions, be it from very weak levels. Manufacturing employment recorded the first increase since November 2007 prior to the last recession. Factory payrolls rose 11k in the first month of the year, compared with the past decade’s structural trend of -47k, reflecting the strong impetus provided by the global inventory and trade cycle as reflected in the US ISM report and the global PMIs. Motor vehicles and parts manufacturers added 23k jobs versus -2k previously to mark the largest gain since Jul’09 during the "cash-for-clunkers" stimulus program. Private sector services payrolls rose 48k, after a decline of 69k in December that reversed part of November’s sharp gain (+108k). The January increase was based on broad increases across the dominant retail trade (+42k) and business services (+44) sectors, including temp hires which rose for the second month (+52k).
On the side of continued weakness, the BLS revisions now place the December decline in construction payrolls at -32k versus -53k reported initially, which signals that the negative weather effects were probably more strongly felt in January when jobs in this sector fell 75k. However the January decline is not far from the 2009 average at -84k, which is in line with recent more ambiguous housing demand figures and deteriorating homebuilders’ sentiment. Given the layers of leveraging in the housing sector across the private, financial and public sector’s balance sheets, and still stressed funding conditions, we see little scope for improvement in the construction trend in 2010.
G+ Equities plunged across Europe and the US on Thursday as investor fears consolidated around the vulnerability of sovereign credits and downside risks for the NFP release today; the DJ Euro Stoxx 600 fell 2.7%; Spain’s IBEX 35 dropped 5.9% and Portugal’s PSI 20 lost 5.0%; the S&P 500 ended the session 3.1% lower at 1063.11, marking the biggest drop since 22 Jun’09 (also -3.1%)
FI USTs rallied on the heightened risk aversion; the yield on the 10yr benchmark fell 10bps to 3.600%
€ Spain and Portugal 10yr benchmarks underperformed on the day, with yields rising 2bps and 6bps respectively to 4.118% and 4.721%; the Mar’10 German Bund future rose 49 ticks to 123.70; Portugal’s 5yr CDS surged to a record 229.6 versus 195.35 on Wednesday
FX The euro plunged 3.3% against the yen to 122.20 and was the lowest since Feb’09; EUR/USD dropped 1.2% to an 8-month low of 1.373
$ The benchmark crude oil future fell 5% to $73.0bbl and gold declined 4.2% to $1063.3oz
€ Spain sold €2.5in 2.3% 3yr bonds on Thursday as planned but the auction results showed a much higher average yield of 2.63% versus 2.14% recorded at the previous 3yr auction on 3 December; bid/cover ratio was 1.85 versus 1.72 previously
$ US Fed’s Hoenig (voter) said the “extended period” language needs to be changed in future FOMC statements; zero is not a “normal” interest rate level; the overall economic outlook is positive; consumers have retrenched but confidence is improving
$ US Tsy Secretary Geithner expressed optimism that China will allow its currency to appreciate
$ US factory orders were stronger-than-expected in December, up at a steady pace of 1.0% versus the median forecast of +0.5%; durable goods orders were revised higher to +1.0% from +0.4% reported initially; nondurable orders rose 1.0% as well
$ US nonfarm productivity growth remained robust in Q4 at 6.2% although the pace slowed versus a revised 7.2% in Q3 (initially 8.1%); the moderation was on account of a 1.0% gain in employee hours in Q4, which marked the first increase since Q2’07 (+0.9%); nonfarm output accelerated to 7.2% from 2.2% previously
$ US unit labor costs plunged at an annualized rate of 4.4% in Q4 versus a revised drop of 1.5% in Q3 (initially -2.5%), as the increase in productivity (+6.2%) outpaced compensation growth (+1.5%)
$ US initial jobless claims were higher-than-expected at 480k in the week to 30Jan, up from a revised 472k in the week prior (initially 470k); the 4wk moving average has climbed back to the levels of early-December (469k); continuing claims for jobless benefits rose marginally by 2k to 4.602k in the week to 23Jan; taking into account individuals receiving emergency and extended unemployment benefits, our adjusted insured-unemployment rate was steady at 8.8% in the week to 16Jan, down from a peak of 9.2% in the week to 2Jan
€ The ECB left the main refi rate anchored at 1% as expected and at the press conference following the policy announcement President Trichet repeated that rates remain appropriate
€ The ECB’s report on the covered bond market noted that the market has seen a strong start to the year with €22bn in new issues coming into the market, but pricing conditions remained difficult. As of 3 February, the ECB had purchased €34.353bn in covered bonds out of the planned amount of €60bn
£ The BoE maintained Bank Rate at 0.5% and kept the stock of asset purchases unchanged at £200bn as expected
€ German factory orders declined broadly in December, down 2.3%MoM versus a gain of 2.7% in November (initially +2.8%); the Economy Ministry said that the recovery lost some momentum after Q3; orders rose 0.7% in the 3 months to December versus a gain of 8.8% in the 3m months to September
Will have a short trip to Europe. Will be back next Friday, as my new posts 
The dollar finished a strong week in characteristic fashion Friday, surging to another six month high against the slumping euro after the release of better-than-expected preliminary fourth quarter GDP figures.
Analysts suggest that dollar has entered a sweet spot, rising on encouraging economic news from the US while enjoying its status as the world’s safe haven currency when the global economic recovery is thrown in doubt.
U.S. economic activity expanded for the second consecutive quarter in the final three months of 2009, with the pace of gross domestic product growth far exceeding economist estimates.
A preliminary report released by the Commerce Department showed that gross domestic product increased at an annual rate of 5.7 percent in the fourth quarter compared to the 2.2 percent growth seen in the third quarter.
Meanwhile, activity in the Chicago-area manufacturing sector unexpectedly expanded at a faster pace in the month of January, with employment jumping to its highest level in nearly five years.
Rising manufacturing activity has fueled speculation that the economy is on the road to a sustainable recovery from the most severe recession in decades.
The Institute for Supply Management – Chicago’s index of regional manufacturing activity jumped to 61.5 in January from 58.7 in December, with a reading above 50 indicting growth in the sector.
The dollar hit 1.3862 versus the euro, its highest level since last July. With its recent surge, the dollar has moved well away from November’s 15-month low near 1.5100.
The euro has been crippled by sluggish EU growth and concerns about mounting debt in Greece and other member states.
One day after ratings agency S&P said the British banks were no longer among most stable in the world, the dollar rallied to a 3-week high of 1.5994 against the sterling.
The buck was steady versus the yen, holding above Y90.50. Bank of Japan Governor Masaaki Shirakawa said on Friday that the central bank is ready to take swift, bold action if financial markets become unstable again.
Shirakawa’s comments come after official data showed that consumer prices fell for the tenth straight month. The central bank has already pledged to tackle deflation, vowing that it "would not tolerate" consumer prices at, or below, zero.
A modest increase in the price of oil limited the upside for the dollar against the petro-linked loonie. With traders also weighing data showing that Canadian GDP grew a bit more than expected in November, the dollar held near yesterday’s 6-week high of C$1.0694.
Snapshot at closing session:
Oil pared early gains and closed below $73 Friday, as traders weighed a soaring Dollar and demand concerns from major consumer China over the effect of upbeat data showing a stronger-than-expected economic growth in the US.
Crude oil for delivery in March settled $0.75 lower at $72.89 per barrel in the New York Mercantile Exchange, losing for the third consecutive week after touching a yearly high near $84 earlier this month.
Gold prices fell for a second week with yet another modest loss Friday. With the dollar surging to levels not seen since last summer on risk aversion and mixed economic news from the US, the shine has come off of gold following its run to record highs above $1200.
April gold slipped a buck to $1075 an ounce, having dropped about $20 on the week. Demand concerns have also impacted gold along with most metals following China’s steps to slow down its robust economy.
The dollar rose to a six-month high against the Euro after data showed U.S. economic activity expanded for the second consecutive quarter in the final three months of 2009, with the pace of gross domestic product growth far exceeding economist estimates.
A preliminary report released by the Commerce Department showed that gross domestic product increased at an annual rate of 5.7 percent in the fourth quarter compared to the 2.2 percent growth seen in the third quarter.
U.S. stocks fell, while the dollar and Treasuries rose, as concern over the outlook for technology company earnings overshadowed data showing the U.S. economy grew at the fastest pace in six years. Oil slid for a fourth day.
The Standard & Poor’s 500 Index slid 1 percent to a three- month low of 1,073.87 at 4:30 pm in New York with technology shares sinking 2.1 percent as a group following earnings from Microsoft Corp. and SanDisk Corp.
While both companies’ earnings topped the average analyst estimates in Bloomberg surveys, Microsoft slid 3.4 percent after saying it hasn’t seen a recovery in enterprise software spending and SanDisk tumbled 12 percent as its sales forecast trailed estimates.
The slide in technology shares overshadowed data from the U.S. Commerce Department that showed gross domestic product grew at a 5.7 percent annual pace last quarter, the fastest pace in six years and topping economist estimates.
U.S. equities fell even after the Reuters/University of Michigan index of consumer confidence and the Institute for Supply Management-Chicago Inc.’s business barometer both topped economist estimates.
The S&P 500 fell for three straight weeks for the first time since July and lost 3.7 percent in January for its biggest monthly loss since last February.
The index has tumbled 6.6 percent from a 15-month high on Jan. 19 after President Barack Obama called for limits on risk- taking by banks and China moved to restrict lending and cool economic growth.
The MSCI Asia Pacific Index dropped 1.9 percent. Asian markets closed before the release of the U.S. GDP data. AU Optronics Corp., Taiwan’s largest maker of liquid-crystal displays, fell 5.7 percent in Taipei after posting an unexpected fourth-quarter loss. Advantest Corp., the world’s biggest maker of memory-chip testers, declined 10 percent in Tokyo after forecasting a wider-than-estimated full-year loss.
Europe’s Dow Jones Stoxx 600 Index rallied 1 percent. Bayerische Motoren Werke AG, the world’s largest luxury carmaker, added 4.8 percent after forecasting a profit this year and rising sales in the U.S., China and Germany.
Here is a snapshot of the Stock Markets at the closing session:
$ The S&P 500 fell 1.2% led by a sharp fall in the technology sub index (-3.1%) as Qualcomm Inc. (QCOM, -14.2%, $40.48) issued disappointing forecasts and cited a “subdued” economic recovery; US equity markets had opened the session weaker as several headline economic figures disappointed versus market forecasts
$ At the close of the US session the Senate approved Fed Chairman Bernanke to a 2nd term; Amazon (AMZN, +2.7%, $126.03) reported profits and sales that beat analyst expectations and Microsoft (MSFT, -1.7%, $29.16) reported record revenues
G+ Asian stocks sold off sharply overnight on goring risk aversion: Nikkei -2.1%; KOSPI -2.4%
FI USTs yields fell in a bullish steepening fashion; the 2yr yield declined 6bps to 0.859% but remained above the levels of earlier in the week prior to the release of the more-hawkish FOMC statement; the 2/10s spread stands at 277bps vs 273bps Wed
€ Concerns related to Greece’s fiscal situation continued to mount and the sovereign 5yr CDS rose to another record high; the yield on the Greek 10yr bond rose for a third consecutive day, up 40bps on the day to 7.142%;
€ The escalating Greek crisis prompted a statement from the European Commission that Greece would receive last-resort help from Eurozone states (but not the IMF); Spain plans to announce a deficit-reduction plan to stem contagion from Greece
$ The US may exempt Treasury holdings from new bank tax
FX The euro fell against most major currencies on Thursday on pressure related to Greece, ending the day 0.4% lower against the USD at 1.396 after hitting an intraday low of 1.3938 that was the weakest since mid-July; the DXY index rose for a 3rd session, up 0.3% to 78.90 now at the highest levels since August
$ The US Senate confirmed Fed Chairman Bernanke to a second 4-year term in a vote of 70:30
€ ECB’s Mersch said the most immediate challenge for the ECB is how to remove extraordinary policy support; "the next round of measures will probably be announced when we will have the next projections of the euro zone at the beginning of March"
$ US durable goods orders rose 0.3%MoM in December and disappointed versus the median economist forecast of +2.0% on a sharp drop in civilian aircraft bookings (-38.2%); excluding transportation goods, orders were up 0.9%
$ US initial jobless claims were lower at 470k in the week to 23 January versus a revised 478k in the week prior (initially 482k) but the figure remained about the 4wk average for a 3rd consecutive weak; continuing claims fell 57k to 4.602m in the week to 16 January and were the lowest since early-Jan’09
€ Eurozone EC industrial confidence rose 2pts to -14 in January and was the highest since Sep’08; the consumer confidence index stalled at -16 in January after nine months of improvement
€ German unemployment rose 6k in January but the result came in below the median economist forecast of 15k; the unemployment rate rose to 8.2% after three months at 8.1%
£ UK GfK consumer confidence index rose for the first month in three, to -17 from -19 before
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