FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
S&P downgradedItaly’s long-term debt by one notch overnight, from A+ to A, on expectations of weak growth. It also cited the country’s fragile politics as a hindrance to its ability to reduce debt. The outlook on debt remains negative. The move is likely to cause an escalation in fears over the Eurozone but may also provide the impetus for Eurozone governments to speed up their austerity plans, and efforts to push the July 21agreements on the EFSF past parliament. InGreece, the government announced it would hold another conference call with the Troika today and the results of the talks may be announced as early as Wednesday.
It appears that the next aid tranche will be released in exchange for further austerity measures, though the market will also question how long the status-quo is sustainable. In other news, the RBA minutes largely mirrored the post-decision release as the central bank noted weak external developments were a risk, but also an effective factor which could contain domestic inflation. Japanese Finance Minister Azumi saidJapan’s economy would not recover as quickly with a strong JPY and said he would explain the country’s position at the G20. Ahead today we expect risk to continue trading on a heavy tone. EURUSD trade 1.3583-1.3688 overnight and USDJPY 76.45-76.66.
EUR
The Financial Times reported that a German industrial group withdrew some of its money from a French bank and put it at the ECB. Partly this was because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter said.
The ECB purchased EUR9.79 bn of peripheral market debt last week.
The ECB’s Weidmann said that the EFSF doesn’t necessarily need its AAA rating. Without a AAA rating then the effective capacity of EFSF can be increased within the current framework (>EUR250bn out o EUR440bn). However this is probably an implicit acknowledgement thatFrance is not a AAA country.
The Greek government will continue talks with the Troika today after Monday’s conference call, we expect details to be released Wednesday on the next EFSF tranche.
ECB President Trichet said overnight that Eurozone banks must strengthen balance sheets and improve their resistance. He also stated that the swap line agreements between central banks showed ‘close cooperation’ with the Federal Reserve, and again called upon all governments to apply measures adopted on July 21st.
A story in Greek papers said Greek PM Papandreou was planning a referendum on Eurozone exit, and said a bill may be put through parliament in the coming days.
CHF
According to the SNB’s important monetary policy data for the week ending Sept 16, the total sight deposits in CHF at the SNB on an average stood at CHF247.4 bn.
The Swiss State Secretariat for Economic Affairs (SECO) just published its September ’11 econmic forecasts. It now expects GDP (real) growth of +1.9 % in 2011 (prev +2.1%) and +0.9% in 2012 (prev +1.5%). This compares to UBSe growth forecasts of +2.0% and +1.3% for ’11 and ’12 respectively.
GBP
The Financial Times reported on Monday that a GBP12 bn black hole has opened in the UK’s public finances which, if true, would lead to lower economic growth numbers and provide problems for the already implemented fiscal austerity plan.. UK Business Secretary Vince Cable said he did not believe in the story.
The Rightmove House Price Index showed a 0.7%m/m gain, 1.5%y/y. The BoE minutes are due this week and we note an extra voter for QE is possible. We expect GBP to remain under pressure in the near term.
AUD
The RBA minutes affirmed a neutral stance from the central bank. The release was broadly in line with the policy statement and far more balanced than current market expectations. We believe that the OIS markets are pricing in too many rate cuts before year-end.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
