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Euro strength at the mercy of the ECB

The US dollar is better bid as US jobless claims fell by 7,000 to 42 year lows; the core inflation improved to 1.9%y/y from 1.8%y/y rather surprisingly in September given the subdued retail sales reported over the same month.

In the Eurozone, the headline inflation  accelerated by 0.2% in month of September in line with expectations, the core inflation stabilised at about 0.9%y/y. The ECB’s efforts seem to be paying back as the fall in oil and commodity prices appease.

Fed member Dudley’s hawkish comments favouring a December rate hike sent the US 10-year yields back over 2%. Despite the fact that liquidity conditions will likely be less than favourable investors should still keep an eye out for the possibility of a December rate hike. The probability extracted from US sovereigns is still a meagre 30%. The banking sector printed mixed Q3 results in the US. For the major US banks that already have announced results, the third quarter has been a clear miss. Encouraging news came from Citi, while Goldman missed its EPS estimate by 8%. Nevertheless financials outperformed in the US with JPM (+3.17%), GS (+3.04%) and Citi (+4.44%). The prospects of higher rates and stabilisation in the commodity and FX prices carry hope. Nevertheless, the cheap energy prices weigh on small to medium sized energy companies balance sheets. And banks could only share the pain by attributing flexible conditions on their loans. 

It seems like the EURUSD is going to end the week on a failed attempt to break above the 1.15 mark. The trend in EURUSD has been positive but timid since it dipped at 1.0809 in July. Buyers enter the market cautiously as the appreciation in the euro is ultimately at the mercy of the ECB.

In his speech yesterday, Governor of Bank of Austria Nowotny mentioned that the ECB is clearly missing its inflation target. Interestingly, the hawkish ECB members soften the tone.

The most hawkish Bundesbank could also join Mr. Draghi in his efforts to keep the euro at competitive levels after German exports tumbled by a significant 5.2% in month of August and the scandal around VW could further damage the trade terms.

The Euribor interest rate futures price in deeper negative rates in the Eurozone before next week’s ECB meeting.  Still, the consensus is status quo in rates and a possibility of expansion in the Quantitative Easing program. The Eurozone sovereigns are in demand today. The German 10-year yields ease back to 0.545% and the spread between the core and the periphery remains steady.

The DAX consolidate gains circa 10000 mark, utilities and financials lead gains. Defensive stocks are in the sidelines on better appetite in stocks.

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