FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sentiment was mixed in Asia after Standard & Poor’s downgraded Spain and US stock markets closed lower. S&P downgraded Spain to AA- from AA and kept a negative outlook, citing high unemployment, tightening credit and high private-sector debt as the main reasons. As S&P’s decision only matched Fitch’s move to downgrade Spain and as there is no indication of a similar short-term move on Italy, the impact on the euro was muted. Given still subdued investor sentiment and hence extreme short positioning in pairs such as EURUSD and AUDUSD, any downside remains corrective, especially with scope for additional positive surprises and hence more position squaring over the coming weeks. Apart from the EU summit later this month, investors will also focus on the US Q3 earnings season, which picks up pace from next week. As domestic spending and external demand may have held up better than initially expected, there is potential for positive surprises, especially as expectations have been dampened by several profit warnings; the manufacturing and retail sectors should provide a gauge of demand conditions. In Italy, Prime Minister Berlusconi faces a confidence vote today, which we expect him to survive as we anticipate no disruptions from the Northern League after the party’s leader said yesterday that the government would survive today’s vote. US stock futures are trading broadly flat. EURUSD traded 1.3723-1.3783 and 76.86-76.98.
EUR
The Slovakian parliament finally ratified the July 21 agreement to enhance the powers of the EFSF. Slovakia‘s decision removes the final political obstacle to implementation given that all seventeen Eurozone nations have now completed the ratification process. Most significantly, the new powers authorise the EFSF to buy Eurozone sovereign bonds in the secondary market, which in principle would allow it to relieve the ECB from doing so. The EFSF announced that it would finalise procedures to use its new instruments “in the near future”.
The EFSF announced that any decision to use its lending capacity more efficiently through leveraging will not affect its triple-A rating.
EFSF CEO Regling said he is sure that the EU Summit on Oct. 23 will have enough substance to respond to market concerns. The euro did not react to this remark.
Eurogroup Chairman Juncker said he is expecting to receive the troika’s report in the middle of next week, and that he is optimistic that Europe will disburse Greece‘s sixth tranche. He said that all those who are speculating that Greece will leave the Eurozone are wrong.
ECB President Trichet said it is important to avoid any suggestion that Eurozone countries other than Greece might fail to fully honour their debts.
The ECB’s monthly report noted that private sector involvement in the debt crisis can be expected to add to FX volatility, to damage the euro’s reputation, and to have a direct negative impact on the banking sector across the Eurozone.
ECB Executive Board member Gonzales-Paramo said the pursuit of price stability remains the central bank’s main objective and that it tries to keep market interventions at the lowest appropriate level.
JPY
Finance Minister Azumi said he would urge his European counterparts to make use of a large-scale scheme, including the EFSF, to support the banking sector. He added that he would also consult with the US as needed on how to help tackling the EU debt crisis.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
