Jan 2, 2015. Euro starting the year at a new low

–Euro at a new low this morning  (120.50) as Draghi said there is increasing risk of the ECB not meeting its price mandate.  Additionally, PMI data was weaker than expected in the EU, with France and Italy below 50.  France was 47.5 vs expected 47.9 and Italy 48.4 vs 49.6.  The FT ran a piece on Italian President Napolitano’s resignation speech, described as generally downbeat.  The article notes that “recent polls have shown that most Italians have lost faith in the state and political institutions as their country struggles to emerge from a triple-dip recession.”
–The euro$ curve flattened to new lows for the end of 2014.  Red/green pack spread fell over 1 bp to end the year at 69.  Red/blue and red/gold both fell 1.875 (reds +1.125, both blues and golds + 3.0), with the latter at 123.75, down 180 bps on the year!!  Ten year yield ended the year at 2.17, down 1.6 on the day.
–Today’s news in the US includes PMI expected 54.0 and ISM at 57.5, highlighting the divergent growth rates of the US and the Eurozone.  However, it’s often noted that monetary policy actions operate with a lag of about six months.  In this category I would also put outsized market moves, such as those in the USD and in crude oil in the last half of the year.  The move in the USD is certainly disinflationary for the US, and is reflected in the curve currently.  The drop in oil is a mixed bag, hurting the energy sector which is a major driver of employment growth, while helping both companies and consumers as a cost input declines.  My guess is that the curve flattening portends somewhat slower US growth going forward, and the the Fed will tend to soften its tightening rhetoric as the year proceeds, which will result in modest steepening.

Posted on January 2, 2015 at 5:27 am by alexmanzara · Permalink
In: Eurodollar Options

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