While investor exuberance may be returning to Europe as shown by yesterday’s successful Greek bond auction, there is some evidence that the same exuberance maybe dissipating with respect to US stock markets, after another US sell-off yesterday. Some have said that yesterday’s sale of five year Greek bonds and the related fall in bond yields across the periphery is a sign of confidence returning to a region that has had its fair share of tribulations over the past few years. These record low borrowing costs in Italy and Spain, amongst others fly in the face of an economy still grappling with sub-par growth and record levels of unemployment, and it is more likely that some investors are front running a belief that the ECB will embark on a bond buying program, to combat a deflation threat, as the euro continues to edge higher. Such is the nature of the bond market in Europe right now that a 5 year investment grade New Zealand bond has a higher yield, than its Spanish or Italian equivalent, and yields just 70 basis points less than a 5 year Greek bond, which is still rated as junk. That’s not much of a risk premium. As with yesterday’s car bomb in Greece this bet on ECB QE is one that could blow up in investors faces, given that no-one has any idea of how such a program would be implemented, with the likelihood that it will be fiercely resisted at a number of political levels in Germany, and certainly won’t happen before the ECB (AQR) asset quality review which is scheduled to be completed in October. In any case after a two day Fed induced rebound on Wednesday normal service was resumed on US markets yesterday as the fears that had prevailed in the early part of this week and the end of last week about elevated and unrealistic valuations returned with a vengeance as US stocks gave up all of their Tuesday and Wednesday gains, and came crashing back down to earth with their worst one day performance in two months, while the Nasdaq had its worst day since 2011. Finally it appears that markets are looking past the froth of unrealistic valuations and starting to adopt a “show me the money” approach, and this is likely to be reflected in a sharply lower open this morning in Europe. Throw in some concern about the Chinese economy after a poor set of trade numbers yesterday and some mixed inflation data this morning, the likelihood of a large increase in Chinese stimulus remains very much the outlier, when offset against concerns about their over-leveraged banking sector. This morning’s inflation data showed CPI at 2.4% for March, an increase from February’s 2%, but down on the month by 0.5%, while PPI also remained weak, reinforcing fears of an economic slowdown here. Concerns about deflation still remain at the forefront of market concerns in Europe with today’s final German CPI numbers for March expected to show a fall in prices from 1% to 0 9%. ECB President Draghi has insisted that the central bank doesn’t see a deflation threat and that the fall in prices remains a product of fiscal readjustment in the countries concerned as well as falling energy prices. While that assessment has invited scorn from a number of different directions the fact remains that since the beginning of this year the Reuters CRB index is up 11%, with Arabica coffee up 70%, with corn, wheat and soybeans all up between 10% and 20%, which suggests that we could start to see rising prices return in the coming months, making ECB QE that much less likely. EURUSD – four successive up days on the spin as the euro continues to push ever closer to the recent highs at 1.3970. A break above 1.3870 is likely to see this unfold. Any pullbacks are likely to find support at 1.3780 and below that at the long term trend line support at 1.3700. GBPUSD – we’ve seen a double tap of the 1.6820 level and as such this area becomes much more important with respect to further progress. The area between here and 1.7045, the 2009 highs, is now huge resistance, but it looks like we could well see a significant crack at it. As such the weekly close becomes more important with a close above 1.6723 being the highest weekly close for the pound since October 2008, with a move above 1.6880 putting the pound above its November 2009 highs. While below the risk of a pullback towards 1.6540 remains a possibility. EURGBP – continues to range trade with a cap currently around the 0.8300 level. Only a move below the March lows at 0.8205, argues for a move towards the lows this year at 0.8158. The resistance at the 200 day MA at 0.8410 remains a key obstacle to further gains. USDJPY – breaking below the 101.70 area the next key support remains at the 101.20 area and the March low. A move through 101.20 opens up the 200 day MA at 100.80, a break of which could well see a move towards 98.60. Any recovery now needs to push back through 102.80 to stabilise. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. 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