The initial flurry of excitement seen in the market this week died a death on Thursday. There were two main reasons for this. Firstly, the Epiphany holiday in much of European served to keep volumes very subdued in many markets. Secondly, many investors are waiting for today's US employment report before making firmer judgments on the direction of the US economy in the first quarter. After the strong indication from the ADP report on Wednesday, you can be fairly sure that the market is braced for something in the 180-200k area, after the modest 39k increase seen in the November data. However, what is will be important for 2011 will be to see some of these gains sustained. Last year, monthly changes in payrolls varied from 432k to -175k (census distortions playing some part). With the current pace of job creation, it will take more than seven years to reach the pre-recession peak in employment. Owing to population and labour market growth, a return to the pre-recession unemployment rate will take even longer.
Swissie wins the day once again. Thursday was similar to Wednesday, with the bigger moves coming toward the end of the European session. It was the Swiss franc that was the main winner, largely reversing the weakness seen early on Wednesday. Of the euro crosses, EUR/CHF headed down towards the 1.2500 level towards the end of the day, more than reversing the weaker tone seen earlier this week.
Euro still sensitive to sovereign risks The widening out of the main sovereign CDS index back to the 210 level was a factor in pressuring the euro towards the end of Thursday's session. French supply was comfortably taken by the market, whilst details of the five-year EU bond issued Wednesday revealed just over 70% of the issue being taken up by European investors. Furthermore, central banks and 'official' institutions took nearly 39% of the issue. Spain, Italy and possibly Portugal are all seen issuing next week, with January and the first quarter always the busiest time in terms of sovereign funding.
European sovereign risks overtakes emerging Europe. The other interesting point on the sovereign CDS side is that the aforementioned Western European sovereign index moved above the similar measure for central and eastern Europe. Don't take this at face value though. The indices are equally weighted (Germany has same weight as Greece) and CDS are not always that liquid, but it's a telling sign how sovereign default fears are very much a eurozone phenomenon, with the central and eastern European index having been very steady around the 200 mark for most of the past three months.
Germany consumer wobbling in November. The numbers were surprisingly weak, with sales falling 2.4%, after a 0.1% rise in October, which itself was revised lower from 2.3%. The data is not that encouraging for the long-held desire of Germany to shift towards more consumption, with less reliance on exports, something the rest of Europe is keen to see but Germany less so.
Brazil puts on the brakes. The central bank has announced measures to attempt to curb the strength of the real, asking domestic banks to hold higher reserve requirements against fx positions. The real was initially little moved on the announcement, which comes after Chile intervened earlier in the week in an attempt to curb the strength of the peso. The Chilean peso is more than 5% weaker this week vs. the USD, the real 1.5% softer.
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