Macro data in the US have been mixed the past week, with a softer than expected ISM, especially on the services side and manufacturing new components, but solid payroll growth. In the Euro Area, headline flash HICP inflation came below expectations, mainly driven by lower energy costs. Energy prices have collapsed since the second half of December - TTF is down ca. 20% and oil ca. 8% - partly because mild European temperatures have driven down demand.
The fall in gas prices has been a boon for European assets, which have outperformed their US counterparts since December, suggesting investors have been reassessing Europe-related risks quite succinctly. China's reopening makes risky European investments more attractive: and with the US dollar peaking, European stocks might also become a viable alternative for US-based investors as the market participants look to produce Alpha ex China after loading up on Asian assets.
European equity volatility has also come down and looks low vs. the US, creating opportunities in the options space.
Call switches on DAX vs. S&P 500 ring a loud bell hear, particularly given the exposure of DAX to lower energy costs and better China growth.
Conversely, European rates vol continues to be elevated relative to domestic equities and US rates.
To reiterate, a less harsh global growth environment driven by China reopening and a fall in energy prices is a pro-Euro, which should trigger a return to EURUSD 1.1000 + if not a full-out extension to 1.1500 in 2023
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