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Equity markets began the new trading week rocketing out of the gates, with the bulls in full control over the course of the entire session as traders gobbled up asset classes associated with positive risk appetite.   Investors chose to ignore the potential implications of what the referendum in Eastern Ukraine could  mean for the geopolitical issues in the region moving forward, and instead focused on positive developments out of China  where the government signaled they would relax controls on foreign investment in listed companies thereby  enhancing  liquidity.   The S&P came  just shy of a new intra-day high, but managed a record close adding another 0.97% to its valuation.   As a result of the flight to chase yield,  USDJPY gave up  its fight to hold below 102, while the yield on the 10 year-US treasury increased to 2.65%.

Currency markets were  less enthusiastic then equities, with the majority of the majors remaining relatively well contained during a day devoid of major economic  events.   The Loonie traded flat on the day, with  the rebound witnessed in USDCAD  on Friday  unable to find the required legs to push the pair  convincingly past the 1.0900 level.   That  being said, there was a notable turn in the spread between 5yr treasury yields and 5yr Canadian bonds  on Friday, which is important considering the spread between debt instruments  in North America and the price action in USDCAD have moved in lockstep since 2012.   While correlation does not imply causation, this will be a reminder for Loonie traders to keep an eye on  the prices of US bonds this week, as in a week with little tier-one Canadian data,  treasury yield may well shape up to  be the main driver of price action for USDCAD.   Given the recent string of better than expected economic indicators flowing out of the US now that the exceptionally cold winter is behind them, we feel the  topside risk lies with  treasury  yields  edging higher over the week and taking USDCAD along with it.

There was a slew of Chinese data released overnight, all of which reinforced policymakers warnings yesterday that market participants must recognize and come to terms with the fact that economic growth is slowing.   Industrial output, retail sales, and fixed asset investment all came in south of what economists had been expecting, along with easing from the previous March readings.   Fixed asset investment slipped from 17.6% to 17.3%, consumer demand cooled with retail sales  dropping  from 12.2% to 11.9%, while industrial output weakened from 8.8% to 8.7%.   While the data set will no doubt have some speculating this will spur policymakers to loosen monetary policy; however,  we still tend to lean towards the government engaging in capital market reform and targeted fiscal stimulus versus and all-out credit fueled reflation.   The Shanghai Comp was unable to build on its gains from yesterday, finishing its session lower by 0.1%.

Over in Europe, the economic calendar didn’t fare much better, with the German ZEW survey printing at 33.1, below the median analyst estimate of 41.0, and a tumble from the 43.2 registered in April.   While the current conditions sub-index was a little rosier than in April, the headline economic sentiment reading posted its fifth consecutive monthly decline, and now stands at its lowest level since January of 2013.   Still struggling with a relatively high EUR and the subsequent impact on its export sector, the slide in sentiment readings since the beginning of 2014 is cause for concern that growth  economic growth in  Germany is slowing.

Not helping the prospects of the common-currency this morning, the Wall Street Journal reported that Germany’s Bundesbank is set to back “an array of stimulus measures from the European Central Bank next month, including a negative rate on bank deposits and purchases of packaged bank loans if needed.”   While the central bank did release a statement afterward that said it was nothing new in terms of their ability to act when required, it still highlights a change in tone from what one would consider is the most hawkish of central banks in the zone when it comes to inflation.   With the stimulus-friendly comments from Buba this morning, the slide in the EUR has resumed, with EURUSD dropping an additional 50bps and pivoting right around the 1.37 handle prior to the US retail sales figures.

As we get set for the beginning of the North American trading session, retail sales registered in the month of April for the American economy were just released, showing consumer demand was hesitant to begin the second quarter, most likely due to some give-back after the strong numbers registered in March.   While the headline retail sales print only increased by 0.1% versus expectations of a 0.4% increase, March’s number was revised from a 1.2% gain to a 1.5% increase, signaling that while momentum slowed in April, it’s too early to say if this is the beginning of a period characterized by subdued consumer demand, or if its just a pause as households take   breather.   The DXY pushed through the 80 handle on EUR weakness earlier this morning and is still able to hold its ground even after the slightly weaker than expected retail sales.   The Loonie is having a hard time deciding direction ahead of the opening bell, with USDCAD pivoting around unchanged at the 1.09 handle as  broadly stronger big dollar environment stymies any unbridled Loonie strength.   The commodity complex is seeing some decent buying interest this morning, with front-month WTI venturing above $101/barrel, while Gold manages to build on  yesterday’s  gains, fighting to regain the $1,300/ounce level.    S&P futures are essentially flat as we go to print, ceding some of their earlier morning gains after the less than enthusiastic reading on consumer demand.

Looking ahead to  tomorrow, the morning will bring with it a couple of important catalysts for  those with Sterling exposure.    Wednesday  morning will see the release of both the unemployment rate for April, as well as the Quarterly Inflation Report from the  Bank of England.   The Quarterly Inflation Report has been a key tool of the BoE in regards to providing updated forecasts and introducing  new forward guidance, thereby making  tomorrow’s  report a major event for those that trade the Pound.   The last inflation report from the BoE saw the central bank try and  reassure markets that interest rates hikes were still a ways off considering the spare capacity in the economy, and when  monetary policy did begin to tighten, the rate increases would be gradual and limited.   We expect that  tomorrow’s  report will reiterate the gradual tightening nature  of monetary policy across the pond, but still reinforce the fact that rate hikes are expected before the  Fed and ECB,  keeping the Pound attractive on a relative basis to the USD and EUR.   It will be important  for participants to  focus on any communication within the report that references the developments of spare capacity within the economy, along with if there are any  hints of when rate hikes  can be expected given the outlook for inflation.   Given the housing market recovery and the positive economic indicators  from the labour market, well feeltomorrow’s  report may take a hawkish slant, and therefore could pose upside risk for GBPUSD along with  other GBP-related  crosses.