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Fundamental Afternoon Wrap: French kiss goodbye as economy diverges

A quieter afternoon for institutional research sees a retrospective focus put on the Italian downgrade and NFPs and the continuing divergence taking place in Europe, especially between France and Germany. Further, in Asia, analysts have noted the underlying and gradual improvement in Japanese conditions but are not sure whether this can be attributed to Abenomics just yet

EUR

Brown Brothers Harriman analysts note that the recent string on European economic data points to a divergence of economic activity: they feel that Germany is likely to not likely to repeat its recent contraction, but there is serious divergence appearing between it and the rest of Europe. They highlight France as the key example and note that there looks to be growing resistance to France being granted more time to reduce its budget deficit. Looking to the Italian rate cut, they are not paying much especial attention to it as they feel it is largely a catch up move as it was the outlier of all the ratings agencies.

Danske Bank analysts feel that following Friday payroll surprise, EUR/USD is back in the textbook set up with an improvement in the US labour market fueling expectations that the Fed will start to look at its exit and hence is dollar positive. Thus, they write, “the days of financial stress when positive US data would fuel expectations of more monetary easing and hence be dollar negative may now be a thing of the past.”

JPY

Brown Brothers Harriman analysts note that economic conditions in Japan look to be slowly improving, but they feel it is too early to give credit to Abenomics just yet. Raymond Ven der Putten of BNP Paribas however notes that overnight data plummeted, but he feels that this is likely a statistical blip caused by bad weather rather than trend reversal. He feels that domestic orders should increase in coming months off the back of the improved export outlook and increased government spending. Nick Bennenbroek of Wells Fargo notes that the yen remains weak, approaching a 3 ½ year low, in the face of weak data and as BoJ nominee Kuroda suggested open-ended asset purchases will be considered sooner.

Forex Flash: ECB keeps financial markets undisturbed – Merrill Lynch

Despite looming uncertainty, financial markets aren't disturbed thanks to ongoing central bank support by the ECB. "The ECB delivered the closest we are ever likely get to forward guidance when citing its commitment to an accommodative monetary policy for as long as necessary and that both spot and forward Eonia rates would be monitored carefully for any unwarranted tightening", wrote Merrill Lynch analysts, adding that the ECB also threw the ball back into the court of governments with regard to reviving credit. "It argued that cleaning up banks’ balance sheets is not its business. But as we argued before, a balance sheet clean-up could become ECB business if a fiscal backstop to recap the banks can be assured", they added, pointing to a still long road to reach a Eurogroup agreement on this as "North European countries refuse to share the costs of clearing legacy assets, while some south European economies cannot afford to add bank recapitalization costs to the public sector balance sheet".
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