Intraday Market Thoughts

Deposit Insurance Chatter Appeases Fears, China PMI Next

by Adam Button
May 24, 2012 0:51

A rumour about a plan to roll out Europe-wide deposit insurance cushioned a fall in risk assets on Wednesday. The yen was the top performer while the euro lagged. The market will now shift its gaze to China due to the upcoming HSBC manufacturing PMI. Todays Intermarket Insights chart the implications of the breakout in the USDX to 2-year highs, with new trading ideas in EURUSD and AUDUSD. See more below.

Fear about a Eurozone break-up gripped markets once again, sending the euro to 1.2550 from 1.2685 early in US trading. Various reports that Europe is preparing contingencies in case of a Greek exit from the euro ratcheted the fears higher. Another story continued to circulated about how European leaders would forgive 50 billion euros in Greek official borrowing in the event of an exit hinted that at a real possibility of a breakup.

The EU Summit provided the regular disappointing headlines for the most part Merkel rejecting Eurobonds, the Dutch PM saying hes not in favour of bank recapitalizations via the ESM and Finnish leaders saying Europe has done enough for Greece. Late in the day, a rumour about a Europe-wide bank deposit scheme to sparked a rebound in risk assets.

The flight to German debt underscores banking risks. German yields hit record lows across the curve Wednesday, in part due to depositors in periphery countries looking to park funds in foreign assets that their local governments cannot forcibly to convert to a newly issued currency like the drachma.

The S&P 500 declined as much as 1.5% but rebounded to a narrowly positive close on the bank insurance rumor and vaguely dovish commentary from the Feds Bullard and Kocherlakota.

The main event of Asia trading and perhaps the most important data point of the week is the HSBC China manufacturing PMI at 0230 GMT. The metals markets and commodity FX is skittish about a Chinese slowdown and soft data points to GDP growth at 7% rather than the 8% expected. The recent proclamations from Chinese officials on pro-growth policies have only served to underscore the fears.

The HSBC PMI was at 49.3 in April and has been below 50 since November. A fall below 48 would confirm the slowdown but the tepid tone of the market means that an upside surprise (49 or above) would provide a bigger bang to AUD and the commodity bloc.

Wednesdays Intermarket Insights include trades on EURUSD, AUDUSD, USDCAD, gold and US crude oil . DIRECT access to today's Insights is found here: Non subscribers can click here:



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