NFP Wake Up Call

We are back to where we started, well almost. The benefit of last week's EU summit has been erased amongst periphery product yields. Spanish Bonos have come under pressure again following yesterday's turmoil. Today's weakness is being attributed to the loss in confidence by the market and the increasing expectations for the need of official assistance beyond the +EUR100b supposedly earmarked for Spain. More of a danger sign is that shorter term Spanish product is beginning to now under-perform. FI dealers have the country clearly in their cross hairs. Peripheral bond market activity suggests further pressure on the EUR left hand side as we wait for the grandfather of economic indicators, NFP.

The ECB came, they saw, and did not deliver what was expected. Consensus has the market believing that by not cutting more than-25bp yesterday the euro-zone seems to be refusing to address the confidence crisis of the region. The lack of aggressive pro-action is leaving the door ajar for further financial turmoil. The single currency occupies the epicenter of global uncertainties and with policy makers not been aggressive enough in their actions to combat “contagion” can only foster further negative spillover effect. The market systematically continues to hone in on Spanish banks and the country's product. By day's end, the ECB's policy easing is increasing the single currency as a funding vehicle against other higher yield emerging market currencies. We can now expect this to become the throw word or description for the EUR short term.

The BoE, PBoC and ECB actions yesterday was supposed to be the best possible scenario for those expecting stimulus. Without knowing the Fed's intentions, the covert “collaborated” intentions by policy makers acting in unison was to bolster growth and confidence in the markets. So far, it has failed miserably and again will be tested with this morning employment numbers. The obvious question, how much of this feeling had already been priced in? The new reality, policy makers cannot rely on the combination of the recent EU summit announcements and a rate cut to buy them copious amount of quite time over the summer. Unlike the European holiday season, the rest of global markets will be “kicking the Euro tires.” Policy makers it will have to start considering other non-conventional measures to boost market confidence.

Despite the lack of confidence again leaving the EUR vulnerable this morning, the market has to contend with US employment numbers. Even with the market holding its collective breath, the report is leaning towards reporting an “anemic pace of a US recovery, in line with the recent deterioration in ISM data. Consensus is leaning on a conservatively upward print of +95-100k, just above last months print (+69k). The recent creeping higher of weekly jobless claims supports a slowing down hiring pace with a bias towards a downside reporting risk this morning. Mind you, yesterdays ADP print would argue this point. An eyesore of a print this morning would be the interesting of scenarios. To a few, it could be viewed less negatively. Some analysts believe it may pave the way for additional QE measures at the first FOMC meeting in August.

Our position graphs this morning have the retail sector firmly long EUR's at or close to current levels. They have been good buyers all the way down yesterday, prudently paring record short positions ahead of this mornings employment release. With other asset classes in the red, portfolios have to record in the black somewhere and being short the Euro-zone continues to pay off. Even sitting close to the lows, the bias remains with the bears. The market continues to favor selling the uptick strategy with a technical target of a 1.22 handle. Despite sitting in oversold territory, the techs are showing that the daily trend levels tick south. There will be no free fall due to the plethora of buying interest straddling 1.23 first time around. Now its time to appreciate the calm before a potential storm!

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The EUR is to do what?