Risk is off the Menu

Market appetite for risk remains subdued this morning following unexpectedly weak Unemployment data from the U.S. on Friday. The has once again caused investors to consider the possibility of further quantitative easing from the Fed and once again seek haven in the Dollar. At home, data this morning was upbeat, with the UK house-price index rising to a 21-month high in March, although the Royal Institution of Chartered Surveyors attributed the rise to first-time buyers taking advantage of an expiring property-tax exemption. Following a weak response to the Spanish bond auction last week, market participants remain cautious ahead of the French bond auction later today, while an Italian auction is scheduled for tomorrow.

Pound Sterling – UK Markets

Following last week’s upbeat PMI readings, new data released today continues to point towards an improvement in the British economy. Sterling has managed to hold on to its recent gains against the Euro, after The Royal Institution of Chartered Surveyors reported that its UK house price index rose to the highest level since June 2010. The Lloyds Employment Confidence index also improved for March. The British Retail Consortium sales data due today is expected to reveal the impact of easing inflation on British retailers. However, Sterling has retreated against the US Dollar as risk sentiment remains affected, following weak job growth in the US and a tepid investor response to the Spanish bond auction last week. Sterling has given up some of its early gains against the greenback with traders turning risk averse ahead of the French bond auction due today. With no other major economic releases due for the day, market expectation appears to indicate that Sterling is likely to respond to the changes in broader risk sentiment.

US Dollar – US Markets

The US Dollar has registered gains against the majors as fears about the debt situation in Euro-zone remains elevated as Spanish and Italian yields continued to rise and ahead of some other key bond auctions during the week. Additionally, a sharp slowdown in Chinese import growth fueled concerns over demand in China and prompted investors to take refuge in safe assets. Today traders are awaiting further cues on the state of the US economy after dismal employment numbers on Friday. Meanwhile, the Fed Chairman, Ben Bernanke, added fuel to QE speculation by stating that the US economy is yet to fully recover from the impact of the global financial crisis. In economic releases today, wholesale inventories for February are expected to register an uptick, while the economic optimism index is expected to improve for April.

Euro – European Markets

The Euro headed south against the majors, as Spanish and Italian yields continued to rise, affecting risk sentiment. Euro-zone economic data was mixed this morning, with the Sentix Investor Confidence dropping sharply, while French industrial production came in as expected and German exports grew more than expected. In an attempt to allay fears, the Spanish PM, Mariano Rajoy, stepped up his efforts to contain the country’s deficit problems, by announcing further cuts of €10 billion in health and education. However, this has not prevented Spanish bond yields from extending its previous week’s rise. Additionally, concerns over Greece failed to subside, with the former Greek Finance Minister, Mr. Venizelos, stating over the weekend that the nation must make a choice between retaining the Euro or returning to the Drachma. Market participants are likely to track closely the outcome of German, French and Italian bond auctions due later this week.

Other Currencies – Highlights

The Yen rose sharply against riskier assets, after the BoJ refrained from further easing at its rate setting meeting, today and retained its key interest rate in the range of 0% to 0.1%. The BoJ Governor, Masaaki Shirakawa, emphasised his increased focus on the long term economic outlook while steering clear of providing any clues over the central bank’s stance. The Yen made further gains, as investors turned risk averse, following weak Chinese import growth for March and growing fears of a slowdown in major global economies. In a significant development yesterday, the Japanese Prime Minister, Yoshihiko Noda, reportedly indicated that the government would initiate anti-deflation talks as early as this month. Looking ahead, investors are likely to track the machine orders data coupled with the relatively less significant bank lending figures, scheduled for release later today.