Daily FX Update, 04 February 2016

OVERNIGHT MARKET UPDATE:

·         US – The non-manufacturing ISM fell in January to 53.5 from 55.8 in December. This is the lowest level since February 2014. The business activity index declined to 53.9 from 59.5, employment fell to 52.1 from 56.3. New orders, a barometer of future activity, eased to 56.5 from 58.9, but nonetheless this sub-component remained at healthy levels. In contrast, the January ADP employment report indicated that the labour market remains healthy, with employment rising 205k.

·         Euro area – The January composite PMI eased to 53.6 from 54.3 in December, but remained well within its range for the past year (52.6-54.3). This loosely implies that euro area growth is holding up around last year’s rates when real GDP growth averaged 0.4% q/q.

·         Currencies – The USD was notably on the back foot as the weaker US services sector report saw markets stop out long USD positions. USD/JPY dropped below levels prevalent before the BoJ and EUR/USD broke above 1.10.

·         Equities – Global equity markets were buffeted in different directions overnight. Europe took its lead from a weak Asian close, with the Euro Stoxx closing down 1.9%, led by banks on weak earnings reports. The weakness was widespread. US equities started their session badly, but staged a recovery, with Dow Jones closed 1.1% higher.

·         Rates – Government bond yields fell in Europe in response to the weak equity markets but lifted a touch in the US. 10-year Treasury yields closed 4 bps higher at 1.89%. Yields on 10‑year UK gilts fell 1 bp, with 3 bps falls for French and German 10-year yields.

·         Energy – Crude oil prices were sharply higher. The bounce in crude oil prices was extreme, with prices up 10% from the low. Prices rose with a decline in the US dollar and the comments from Russia, despite steep gains in US crude inventories. Russian Foreign Minister said if there is consensus among the OPEC and non-OPEC members to meet, "then we will meet".

·         Precious Metals – The gold price remained resilient amid safe haven buying. Physical gold demand from key buyers is also strong.