Daily FX Update, 23 February 2016

OVERNIGHT MARKET UPDATE:

·         US – The flash Markit manufacturing PMI survey disappointed in February. Output, new orders, and employment all fell, but remain above 50. Both input and output prices were below 50, with the slip in output prices to 47.9, falling to their lowest level since June 2012.

·         Euro area – The private sector activity expanded at the weakest pace for over a year in February on waning new orders amid intensifying deflationary pressures. The flash composite PMI dropped to 52.7, the lowest reading since January 2015.

·         Euro area – The German flash composite PMI was weaker, falling to 53.8 in February from 54.5. The decline was driven by a fall in the manufacturing PMI, while the services PMI strengthened slightly.

·         UK – Market focus was firmly on the fallout from the conclusion to the UK negotiations with the other 27 countries of the EU at last week’s summit. The referendum has been confirmed for 23 June and the campaigning has begun. Reports suggest up to 150 out of the 330 Conservative MPs are in favour of the UK leaving the EU.

·         Currencies – GBP had its worst day since the UK’s 2009 banking crisis on the back of ‘Brexit’ fears. EUR was also weak as flow-on impacts were priced in.

·         Equities – Euro area equities strengthened in line with moves in Asia, with the Euro Stoxx 50 up 2.2% and the FTSE 100 up 1.5%. US saw 1.4% rises across all major bourses.

·         Rates – Bond markets were a mixed bag. US 10-year Treasury yields rose to 1.75% on the stronger equities. European sovereign bonds rallied, with 10-year yields falling 2 bps in the UK and 3 bps in the Germany.

·         Energy – The rising risk appetite of investors was supporting the oil rebound rally even after a bleak outlook from the EIA. In a recent announcement the EIA said the global oil glut will persist into 2017, limiting any chance of a price rebound in the short term as the surplus takes even longer to clear than previously estimated.

·         Precious Metals – Gold prices fell as risk aversion waned on hopes the worst is over for US stocks.