FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
In Asian hours risk sentiment has been stable in the absence of any major news. Most Asian stock market indices are trading broadly flat with the Hang Seng down by 0.2%. EURUSD traded 1.3448-1.3489 and USDJPY traded 77.73-77-78. Yesterday, the ECB has hinted that its armory has not been fully deployed yet, and that more aggressive action may be on the cards should politicians deliver on more fiscal integration. German Finance Minister Schaeuble hinted towards concrete plans for fiscal integration. He also said proposals for special funds for sovereign debts of over 60% of GDP would be made at the Dec 9 summit. From that angle policymakers are indeed making more progress. Hence more aggressive action from the ECB cannot be excluded. This in combination with the fact that positioning in pairs such as EURUSD or AUDUSD remains heavily skewed to the downside suggests that there could be more upside potential. Altogether, investors will continue to closely follow any developments on the political front. German Chancellor Merkel will address lawmakers in Berlin today to outline her stance before next week’s EU summit. In the US, growth data has been constructive with yesterday’s release of the manufacturing ISM beating market expectations. Our economists note that the print shows more evidence of some momentum in Q4 as export orders have risen despite the Eurozone’s woes. Data wise non-farm payrolls will be today’s key release.
EUR
ECB President Draghi hinted at some degree of flexibility as he said ‘other elements’ might follow if there is a ‘fiscal compact, binding governments to stronger public deficit and debt rules’. He said the sequencing matters, perhaps stressing that the ECB would not do more unless the Eurozone can show commitment to fiscal union
German Finance Minister Sch?uble said that Germany will ‘propose to set up special national funds for Eurozone debt that is over 60% of GDP’ to maintain market confidence. These comments hint at some degree of joint liability, which is one of many steps along the route towards fiscal integration. The funds would have a maturity of 20 years and supported by national revenues. There is a strong resemblance to the ‘Eurozone Redemption Fund’ plan proposed in early November, though the ‘national basis’ may help get around some constitutional issues’ in Germany.
French President Sarkozy announced that he would be meeting with German Chancellor Merkel again on Monday, to ‘make joint proposals’ for the Eurozone. He said that a collapse of the euro would paralyse France, but also stressed that no Eurozone country will go into default, casting into doubt whether coercive restructuring would take place in Greece or other countries in the coming quarters.
CHF
Yesterday, Swiss Q3 GDP has come in lower than expected, with a yearly increase of 1.3%, 0.2%q/q. The figures will likely add to the pressure on the SNB to act amid weakening external conditions.
Bloomberg reported that the Swiss Government is ‘looking into’ negative interest rates. However, this is apparently a procedural response to routine queries by lawmakers and we would not read too much into the news. Our economists note that the SNB had the opportunity to adopt negative rates this summer when it was engaged in sight-deposit targeting but chose not to resort to this step.
GBP
The Bank of England has released its H2 Financial Stability Report. It warned that Eurozone sovereign and banking risks are still the biggest threat to the UK‘s financial stability and the current environment is exceptionally threatening for the UK‘s banks.
UK manufacturing PMI came in at 47.6, better than expected but still showing contraction.
CAD
Canada payrolls are due on Friday, we are looking for a headline gain of +20k (cons. +17.5k), a reversal of last month’s rather disappointing figure.
We continue to favour CAD as a relative value play heading into next year as the US economy continues to show signs of improving economic momentum.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
