- Sentiment extremely mixed in Europe :
Risk sentiment has been erratic with a risk-off mood in equity markets in Asia given way to a risk-on tone in Europe. While there was little concrete from the weekend G20/IMF meetings, equities are rallying (led by the financials) in response to a UK Telegraph report of a comprehensive plan behind the scenes involving bank recapitalisation and further EFSF expansion. Stronger than expected German IFO data also helped to improve sentiment. However, simple risk-on/risk-off has not extended to currencies with EM FX still under pressure. The liquidation trade has continued with the collapse in gold exacerbated by an increase in CME margin requirements. Indications that some real money managers took full advantage of central bank USD selling to exit short dollar positions tells us that there is still the potential for further large scale liquidation of EM exposures and, with that, further USD upside.
- Still cautious on risk; Greek austerity vote Tuesday, Austria/Finland/Germany EFSF ratification next hurdles:
Looking ahead, we would remain cautious on risk. While markets have responded favourably to expectations of a bank recapitalisation plan, there was little evidence that the politicians are strongly behind this. The French Finance Ministry and Central Bank Governor Noyer have been quick to deny such a plan and indeed more importantly continue to insist that there is no need for bank recapitalisation. German opposition to a Greek default remains absolute; and there are also significant legal objections to the leveraging up of the EFSF. Unless there is new evidence that both Germany and France are willing to shift from their long-held positions, risk can continue to remain under pressure. This week, the immediate challenge will be Tuesday’s Greek parliamentary vote to approve the new property tax as one condition of receiving the next tranche of EU/IMF funding. We have three countries’ parliaments voting on the EFSF; Austria gives its verdict on the EFSF on Tuesday and Finland on Wednesday. Thursday sees the German vote on the expanded EFSF, but given the support of the opposition SPD, passage should be a formality. These are all stepping stones that must be crossed without incident if the euro is to trade with more stability.
- Fed commentary and US consumer confidence on tap:
Last week, Fed’s Williams gave some hint of Fed dismay at the market reaction to ‘Operation Twist’ announcement, acknowledging that ‘questions remain’ on the best use of unconventional policy tools. Markets are clearly further pricing out QE3 (balance sheet expansion) noting the sharp sell off in US inflation expectations and gold. We highlight that both of these market variables rallied whenever the Fed signalled or engaged in balance sheet expansion. In this regard, this week we have a barrage of Fed commentary including Bullard today, Lockhardt and Fisher Tuesday, and importantly Bernanke on Wednesday. Markets will glean their comments for hints on whether further easing is a possibility. Indeed, our economists look for a QE3 by the November FOMC meeting, with likely negative prints for non-farm payrolls (starting with September print on October 7th) and a negative GDP figures (Q3 print on October 27th) key to that view. Ahead of that, we have US consumer confidence (Tuesday) and Chicago PMI (Friday) for which our economists are forecasting weaker than consensus outcomes which could further pressure risk.
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BNP Paribas
Corporate & Investment Banking