Mid-session Europe: Weak earnings drag European equities lower

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Global Sales Trading
Saxo Markets

Foreign exchange

The Reserve Bank of Australia’s surprise cut sent the Aussie dollar into freefall. Later, European equity markets traded lower from the open on the back of weaker corporate earnings.
Among the big names with sharp declines was UBS, whose shares fell 7.8% after the Swiss bank reported lower than expected results amid a decline in wealth management and trading revenues.
The US dollar continued its decline versus major currencies with USDJPY hitting new 18-month lows. In data releases, UK April PMI Manufacturing was a disappointment: 49.2 vs. 51.2 exp.
  • New Zealand Q1 Unemployment Rate (2245 GMT)
  • Fed’s Mester to speak (1430 GMT)
  • Bank of Canada’s Poloz to Speak (1800 GMT)

Forex developments
It’s yet another day where we see USD weaker, especially in the early hours of trading in Europe.
EURUSD visited the area we spoke of yesterday and is finding it difficult to break the 1.1620 so far, which was area that started of the last wave of USD strength that took EURUSD to 1.05 back in March 2015, and which saw EURUSD captured in the range 1.05 to 1.15 for over a year (bar 2 days in Aug 2015). The more we stay above 1.15, the more comfortable the rate might become in accepting a new range. Exceptional good US figures will be needed tomorrow and also Friday to give hope to USD bulls
USDJPY is maintaining the “sleeping JPY shorts” theme that could start rolling should bigger levels be taken out – like 105 which can open the way to 102.5. Risk always with such JPY strength is Bank of Japan coming in, but would they do anything before G7 summit in Japan scheduled for end of May? 107.5 first tech resistance on top side. Main European indices in the red which does not bode well so far with JPY weakness.
GBP had Manufacturing PMI out and showed first contraction since 2013, with expectations at 51.2 vs actual 49.2. GBPUSD has lost most of the gains of this morning that accompanied the weaker dollar. Daily upward channel still intact with 1.4600 being the bottom today of this upward channel. The pattern created so far today with the strong pullback suggests that we should preferably not break lower than lows of today at 1.4661 area or else can start seeing the 1.4600 level again. EURGBP breaking decent tech resistance of 0.7858 area (55-day moving average for today, and also a Fibo level from rally starting November in EURGBP) and next level to watch upside is 0.7900 area around 21-day moving average. Key tech resistance so far remains the level we have been watching lately at 0.7925 which is 200 week moving average.
FX Options volatilities

The market has been buying all morning in EURUSD and USDJPY.  1m EURUSD vol +0,2 from yesterday and +1,5 from 2 days ago and is now trading at 9,3. 1m USDJPY vols +0,5 from yesterday and +1,0 from 2 days ago and is now trading at 12,35.
AUD rate cut was slightly unexpected and this has kept the curve almost unchanged for 2months and out while front end is slightly lower. We expect vols to go slightly lower over next trading days as little news is out near term. Risk reversal is again in demand for AUD puts especially against EUR.
EURJPY little action and option wise also hardly no interest. It looks expensive when measuring realised against historical.  GBP options also pretty much unchanged not really in focus today.
Fixed income

Bunds are surging to 162.80 and a 0.22% 10-year yield, down from 0.30% earlier this week, with little news other than the weak market sentiment to blame for the move. Corporate bonds are softer and ITRAXX XOVER index separates from the tight 300 bps trading range to trade 7 bps higher for the session. Minor impact on Spanish bonds from the expected election call, its sovereign bonds trading 4-6 bps wider to Germany on the day.



European stocks opened lower and trended negatively through the morning. Equities felt the pain from strength in the euro which rose 0.6% to $1.1598 and touched $1.16 for the first time since August.
The exporting-heavy German market was paying the price as the euro gathered steam, pulling the DAX 30 index down 1.6% to 9,960.43.
Moreover, mixed corporate numbers weighed on sentiment. Most bank shares were under pressure, with Commerzbank AG sliding 7.4% as first-quarter profit more than halved and as the German lender cast further doubt over its full-year outlook.
Meanwhile, UBS Group AG shares gave up 6.4%, with the Swiss lender’s first-quarter profit declining sharply to 707 million Swiss francs ($741 million) from 1.9 8 billion francs. But better-than-expected earnings helped push shares of France’s BNP Paribas higher by 2.1%.
Deutsche Lufthansa AG shares sank 6.4% as the air carrier said it may cut capacity to offset weak ticket prices. Meanwhile, luxury auto maker BMW AG fell 2.8% as operating profit declined.
The macro data picture was quiet with the exception of weak UK manufacturing data. UK PMI manufacturing data for April surprised to the downside, shrinking for the first time in three years. The expected 51.2 came in at 49.2, below the 50 contraction level.
France’s CAC 40 stumbled 1.5% to 4,375.27 and Italy’s FTSE MIB slumped 2% to 18,055.72. Spain’s IBEX 35 was down 1.9% to 8,848.00. Wall Street was set for a downbeat trading day on Tuesday, as nervousness returned to the markets after weak Chinese manufacturing and a rate cut in Australia fuelled concerns about the health of the global economy.
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Mid-session Europe is part of TradingFloor’s stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.
US:        US Market Wrap: Trading slows for May Day
Asia:      Morning Report APAC: Watch for Australian dollar volatility today

Shares in Swiss banking group UBS plunged nearly 8% on weaker-than-expected earnings. Photo: iStock
— Edited by Clare MacCarthy and John Acher