World Markets weekly write-up: Post Summit
The week that was:
Maintaining our Euro centric commentary, last week was
highlighted by a – largely expected – ECB rate cut by 25bp to 1% as well as some
changes to the LTRO (long term refinancing operations) program that was
extended. Moreover, Mario Draghi, was also making his own tracks last week by not
extending (nor committing) to any further periphery bond purchases by the ECB,
thereby driving risk appetite lower.
We have since had an EU summit of course, out of which – dare
we say as expected – not a lot came out. The key point was a provisional
agreement towards something that could potentially resemble a fiscal union (
aptly named fiscal compact) along the lines proposed by Merkozy and which
should be put into action by an inter-governmental treaty. Which effectively
the UK vetoed (more on this on a news kiosk near you). It was also decided that
the ECB will manage the EFSF and ESM as of mid-next year, with the latter being
capped to Eur 500bn and not being given a banking licence (as was discussed
previously and in market circles). Finally the Eurobond can was kicked further
down the road, also into the middle of next year with a report (likely to be 2
trillion pages) on their feasibility to be published in June.
To cap it all off, we had the overnight news from Moody’s
stating that , unhappy with the Euro Summit, they would expect to stat reviewing
Eurozone country ratings throughout Q1 next year, the ominous hypothesis obvious
being the impending ratings bloodbath to come. And to quote:
“As a result, the communiqué does not change our view that the crisis
is in a critical, and volatile, stage, with sovereign and bank debt markets
prone to acute dislocation which policymakers will find increasingly hard to
contain. While our central scenario remains that the euro area will be
preserved without further widespread defaults, shocks likely to materialise
even under this ‘positive’ scenario carry negative credit and rating
implications in the coming months. And the longer the incremental approach to
policy persists, the greater the likelihood of more severe scenarios, including
those involving multiple defaults by euro area countries and those additionally
involving exits from the euro area.”
The week ahead
Looking forward into this week, data
on the European side of things peak on Thursday with the flash release of EMU
wide PMIs, which are expected to come in lower. The market will remain focused
to the usual news lines from the European extended circus as well as to the
plentiful Eurozone government bond auctions starting with France today (raising Eur 6bn in short
term Bills), and Italy and Spain coming on Wednesday and Thursday respectively
for more important 5Y & 10Y auctions.
On the US side, we expect a raft
of key data for November, inflation, Retail sales, manufacturing confidence ,
Industrial production, and not least Tuesday’s Fed meeting. The gross
expectation is one incremental recovery, on an “inch forward basis”, whereas
the Fed is not expected to shift its policy stance (if anything they may come a
bit brighter on the outlook given recent data).
Overall, we perceive the market
as rather thin and at the onset of the seasonal “holiday” mode. This is a
particularly difficult time for short term traders, albeit this year with
intraday currency volatilities being rather high the rewards of successful trades
can be high. Our take on short term trades remains USD positive for the week,
albeit in “buy the USD dips” mode rather than outright at current levels. See
our chart updates for more details.