Euro Jumps As Markets Respond Positively to Weekend Developments

• China data not as bad as many had been expecting
• EU assistance to Spanish banks is well received by markets
• Risk correlated assets well bid in early week
• Euro still see higher towards the 1.2800-1.3000 area

Markets are off to a positive start in the early week, with two key developments over the weekend seen as the primary drivers for the initial surge in risk correlated assets. The news that EU assistance to the Spanish banking sector in the amount of Eur100B has well exceeded estimates of most analysts, while Chinese data was not as bad as many had feared. Both of these developments have resulted in a market rally driven by the expectation that the global economy will continue to be supported by proponomics.

Every time we see evidence of governments in a position to pump more money into the system to keep things from falling apart, market participants take it as a sign that things will never fall apart given what seems to be a global coordinated effort to prop the financial system. In Spain, more money will now be allocated to help alleviate the stresses in the banking sector, while in China, a combination of only slightly softer data coupled with contained inflation readings, gives further ammunition to the PBOC to apply additional accommodation to monetary policy. Investors therefore feel comforted by the fact that their governments will continue to keep things as easy as possible even at the risk of longer-term threats.

Perhaps the success that we have see from this strategy out of the US offers additional comfort with this approach, as there have been clear signs of recovery within the US economy throughout this period of ultra-accommodative monetary policy and quantitative easing. At the same time, we also would remind investors that the overriding trend in the market is still risk negative and the rebound that we are seeing can also be attributed to some necessary corrective price action following some intense moves in recent weeks. We contend that this is ultimately the more likely scenario and as such, we would be looking for opportunities to sell risk rallies when the Euro trades into the 1.2800-1.3000 area.