FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The news for the Eurozone simply refuses to improve as Belgium was downgraded late on Friday and over the weekend, Italian newspaper La Stampa reported that the IMF is preparing a EUR600 bn loan for Italy in case the situation worsens. Early on Monday the IMF denied that any discussion was underway withItalyon any form of financing, and the numbers involved lack credibility as the IMF’s totally lending capabilities are far short of that sum.
Nevertheless, the news underscores the amount of nervousness in the market, especially with another major week of bond supply up ahead. Italy alone will the tap the market for up to EUR8 bn on Tuesday and with the 2-year yield already trading past 8%, clearly the costs of borrowing are reaching intolerable levels.Belgium’s downgrade came as a bit of a surprise, but over the weekend, in an apparent response to the downgrade, Belgian politicians finally agreed the terms of the 2012 budget, although the country still has no government.Belgium itself is going to tap the market today, though the amounts are relatively small with our fixed income analysts anticipating no more than EUR500 mn for each of the four lines in OLOs. The German newspaper Welt am Sonntag reported on Sunday thatGermany andFrance are planning a new stability pact on fiscal discipline that could be implemented quickly without having to wait for a full EU Treaty amendment.France,Spain,Austria andGermany will also be in markets this week and every single result will be scrutinized. Eurozone finance ministers are also meeting on Tuesday. Overnight EURUSD traded 1.3278-1.3334 and USDJPY 77.47-77.71.
EUR
Italy’s auction of 6m bills and 2y bonds on Friday was very weak, prompting yields to rise sharply into and after the auction. Two year yields breached 8% intra-day for the first-time since the euro’s launch, and the 2s10s segment of the curve again closed in inverted territory. Attention will now focus on Tuesday’s auction of up to EUR 8 bn worth of BTPs and the meeting of Eurozone finance ministers scheduled for the same day.
A statement issued from the office of Italian Prime Minister Monti on Friday said that bothGermany andFrance realize that “a collapse ofItaly would inevitably lead to the end of the euro”. Over the weekend Bundesbank President Weidmann said he was optimistic thatItaly can “cope with rates over 7% for a while”. Italian newspaper La Stampa reported that the IMF is preparing a EUR 600 bn loan forItaly in case the situation worsens.
Late on Friday, S&P downgradedBelgium’s long term rating by one notch to AA, outlook negative. Moody’s and Fitch rate the sovereign one notch higher, but Moody’s has hadBelgium on review for a possible downgrade since Oct. 7. The announcement came after Eurozone bond markets had closed for the day. A statement from the Belgian Finance Ministry said even after the downgrade,Belgium still has one of the most solid credit ratings inEurope, and is one of the few countries that has managed to stabilize its debt.
Over the weekend, in an apparent response to the downgrade, Belgian politicians finally agreed the terms of the 2012 budget, although the country still has no government.Belgium is scheduled to sell a range of tenors from 10y-30y at Monday’s bond auction which is due to take place at 1100GMT.
The German newspaper Welt am Sonntag reported on Sunday thatGermany andFrance are planning a new stability pact on fiscal discipline that could be implemented quickly without having to wait for a full EU Treaty amendment. The newspaper claimed that this should be enough to persuade the ECB to buy sovereign bonds more forcefully. ECB Executive Board member Stark said “the political pressure on the ECB is enormous”, noting that there is a discussion about expanding the bank’s duties.
ECB Executive Board member Gonzalez-Paramo said accelerated sovereign bond purchases by the ECB are “out of the question because they are out of our mandate”. He said it is essential that the existing SMP program does not distort incentives for pursuing sound fiscal policies. However he did raise the possibility of other measures such as rate cuts and the provision of additional liquidity. Specifically he implied the ECB would not be bound by precedent if it felt the need to lower the refi rate below its historical low of 1%. Governing Board member Mersch also suggested that the provision of term liquidity beyond 1yr might eventually be considered.
The EURUSD 3m basis swap fell deeper into negative territory on Friday reaching -161 bps, and touching levels unseen since Q4 2008. The next 3m ECB dollar auction is scheduled for Dec. 7.
EU Commissioner Rehn said he does “not see the euro falling down” and said he sees no reason to speculate on any possible breakup of the euro. Responding to a question, Irish Finance Minister Noonan said he had contingency plans for a Eurozone break up but said the probability of that happening was “very slight”.UK Chancellor Osborne said that theUK has stepped up its contingency planning in light of recent events inside the Eurozone.
Several other stories were worthy of attention overnight: Dow Jones reported that a major interdealer broker was testing Greek drachma trades against the dollar and euro, though only on a precautionary basis. Elsewhere, German news reported that the six AAA rated Eurozone countries are considering issuing joint bonds. The bonds would not only finance themselves but could also be used to provide assistance to the periphery
Wires reported that the EFSF is now aiming to sell as much as EUR20bn in bills on a monthly basis and diversify funding for bailouts. The leverage idea is also still in place, as the Fund aims to insure 20%-30% of bonds issued, and also hold an additional EUR10bn liquidity buffer. These plans may be sound but the last EFSF bond launch was very disappointing and we remain cautious on the fund’s overall efficacy.
CHF
SNB Vice Chairman Jordan repeated that the bank is “prepared to take new measures, should economic prospects and deflationary risks make this necessary”. He added that “the franc is still at an elevated level”, and that a Eurozone breakup is not a realistic scenario.
GBP
UKChancellor Osborne outlined plans to provide government guarantees for GBP 20 bn worth of bank loans to small and medium sized companies. He said he hoped this would lower their cost of borrowing by 1%.
Bank of England MPC member Fisher said he voted for a GBP 75 bn increase in the asset purchase target because it was “the smallest amount I was absolutely sure we needed to do”, adding that “I still think we might need to do some more”. Fellow MPC member Weale said it would be best to wait until the current round of asset purchases were completed before announcing further purchases beyond EUR275 bn. He reasoned that waiting would allow time for inflation to come down and so the bank’s credibility would not be put at risk. We note that a VAT hike implemented in Jan. 2011 will soon fall out of the CPI calculation.
NZD
Prime Minister Key won the weekend general election. His National Party now control even more seats but still fell narrowly short of an absolute majority. The sale of minority stakes in public assets remains a central plank of Key’s policy ambitions and if these assets are acquired by overseas investors some NZD-positive inflows could result.
GBP
Vice-Minister of Finance Nakao warned that Japanwould intervene unilaterally in a speculative market, but said Japanwas also ready to help the Eurozone nations if needed.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Focus is on 1.3146, the key low from Oct. 4, a break below which would open the way for deeper pullback towards 1.2867. Resistance is at 1.3412.
USDJPY BULLISH Next resistances are at 78.06 and 78.40. Support lies at 77.10.
GBPUSD BEARISH Support lies at 1.5423 ahead of 1.5272, Oct. 6 key low. Resistance is at 1.5566.
USDCHF BULLISH A clear break above 0.9316 would pave the way for gain towards 0.9401. Support lies at 0.9190.
AUDUSD BEARISH Break below 0.9742 would expose 0.9664. Resistance is at 1.0000.
USDCAD BULLISH Near-term resistance is at 1.0474 ahead of 1.0524. Support lies at 1.0346.
EURCHF NEUTRAL Key resistance is at 1.2474 while support lies at 1.2251.
EURGBP NEUTRAL Near-term directional triggers are at 0.8665 and 0.8519.
EURJPY BEARISH Support comes in at 102.43 ahead of 101.62. Resistance is at 104.39.
SCHEDULE
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