Sentiment rises, but for how long?

Sentiment Rises, But For How Long?

Euro sentiment remains high after the Greek deal was finally agreed last week. The question is, how long will it last? For starters we have several big ticket Euro data releases due later this week. In no particular order German and EU wide CPI, German unemployment and EU PPI all hit the wires over the next few days and we also have the second LTRO starting today and ending tomorrow. The market is prepared for around €475bn to be allocated with the Spanish and Italian banks expected to be major users of the ECB funds. The LTRO operations are QE by the back door, and as such will keep Euro sentiment and so the Euro at its recently elevated levels in the very near term. Risks on the downside are if the data outlined above disappoints but also if we see a large increase over and above the expected levels. Greater demand for LTRO funds would indicate continued funding problems in the Euro-zone banking system and a nervous market that is already heavily short the Euro is looking for any reason to sell it.

Sterling looks set for a quiet week data wise with only the manufacturing and construction PMI figures of note later this week. The consensus estimates for both suggest very slight declines from last month but nothing large enough to worry the currency markets at all. Focus is turning towards March’s budget and how the Chancellor plans to kick start the UK economy without room for tax cuts or increased spending. The answer will probably be by lowering tax on lower earners by increasing tax free allowances and paying for it by increasing taxes on higher earners indirectly via tax relief on pension contributions or some other method that can be easily swallowed. Income tax is very unlikely to be touched.

Today kick starts a very important week for the US, there has been a lot of optimism in the markets after the positive jobs number earlier in the month and this week will be a good barometer of where the US economy stands from a trend perspective. The market thinks we are at the beginning of an uptrend, but got it wrong this time last year in similar circumstances. We have durable goods orders, the GDP number, ISM manufacturing and personal consumption data all due this week and because of the optimistic slant the risk remains firmly to the downside.

Report by Alistair Cotton.