« European equities outperformed most global equities yesterday, and peripheral 10y yields in Italy and Spain fell around 10bp. Interestingly, 2y yields dropped by twice as much, suggesting that markets are revising upward the chances that liquidity will be guaranteed by the ECB in coming months.

Markets seem to be pricing a more meaningful ECB easing at tomorrow’s policy meeting than expected by the analysts’ consensus. This is more in line with our expectation of a 50bp cut in the repo rate and a near 25bp reduction of the ECB deposit rate (bringing the carry of holding precautionary liquidity by banks at the ECB down by 25bp). We also expect the Bank of England MPC to announce a further GBP50bn of quantitative easing when it meets tomorrow.

Because of the likely ECB easing, we expect the EUR to weaken, lending support to global risk sentiment to some extent. This is not the pattern suggested by FX option-implied correlations. We therefore suggest that investors position ahead of the event by selling EUR, but against relatively risky assets. We also note that IMF data show that central banks continued to move FX reserves away from the EUR in Q1 12.

Against this backdrop, oil prices rose 4.5% yesterday, supported by Iranian supply concerns. Our expectation of rising oil prices is one driver of our recommendation to be long NOK/SEK. Our out-of-consensus forecast that the Riskbank will cut its policy rate 25bp today, if correct, should also move yield differentials in favour of NOK.

Most G10 currencies were largely rangebound versus the USD yesterday, and with little data out today and the US on holiday, FX and equity price action has been tepid in today’s Asian session ahead of tomorrow’s key ECB and BoE meetings. AUD/USD, currently trading just below 1.03, has been unable to capitalise on its 3% rally since end-June despite strong retail sales data.

Global activity continues to display mixed signals. Our US GDP tracking estimate remains unchanged at 1.5% after factory orders surprised to the upside and inventories to the downside. The UK construction survey registered a sharp drop in June, and credit flows remain weak, reinforcing the need for banking support measures.

However, Australian data continue to surprise to the upside, supporting the RBA’s suggestion that easing has already been significant. Building approvals rose by a record high 27.3% m/m, and retail sales in May rose a larger than expected 0.5% m/m. South African new vehicle sales remained strong in June, but Brazilian industrial output shows no sign of recovery. Malaysian exports rose more than expected but imports surged, resulting in a narrower trade surplus. »

Source: Barclays, 4 July 2012