The market shows an odd combination of relative complacency in risk assets while bonds continue to suggest weak growth prospects. Fairly dovish FOMC minutes likely priced in.
Spanish developments
Spain’s president Rajoy released a plan for saving EUR 65 billion over the next two and a half years as he aims to bring Spain’s. The question will be whether Spain can stand the pain of real austerity when it has already lapsed back into recession before real austerity has even been implemented in the first place. The cuts are aimed at welfare handouts, public wages, pensions and administrative costs and the VAT will be raised by 3 per cent to 21 per cent. Public protests in Madrid are the inevitable result – but what is Spain to do? This is the only path as long as Spain doesn’ t choose a default and exit from the single currency. To stay in the Euro, Spain is dependent on EU welfare, which will increasingly come with strings attached.
German constitutional court
The German constitutional court has threatened it will need as much as 3 months to determine whether it should issue an injunction on the ESM so that it can study its constitutionality. It must be nice to live in a world where time stands still, which it apparently does in the academician German court’s ivory tower. If the court continues to dig in its heels, it could provoke a political crisis, because the political process, and most certainly the markets, simply cannot take this kind of delay.
Yesterday, the ECB’s (Bundesbank’s!) Weidmann spoke very frankly to the court, saying that super-sizing the ESM would strain credibility (even its current size does so, we might add) and even the current ESM would not guarantee that no crisis would occur. He insists that structural reforms are the key for sustainable EU finances.
Looking ahead
The FOMC minutes up later are the obvious focus, but with considerable QE expectations priced into this market, one wonders if there is room for much surprise from their release. So slightly dovish minutes are priced in, meaning a more non-committal, divided FOMC is the surprise scenario for now. The headline of the week on the prospects of QE3 goes to this Monday’s weekly commentary from Hussman funds: What if the Fed throws a QE3 and nobody comes?
I should note on that account that each wave of QE has been associated with diminishing USD downside. QE1 saw the market recovering from the shock appreciation of the USD after the panic deleveraging, QE2 saw a considerable further USD weakening after a rally attempt in early 2010, and then Operation Twist barely got a nod of the head before the USD rally resumed.
In general, the most salient development for the moment across market is the continued persistent rally in government bonds, as US 10-year yield benchmark has pushed all the way back down to 1.50% today, having only closed below that yield once before – on June 1. The German Bund yield is also back lower to 1.28% today. This would seem to be a sign of extremely poor growth sentiment in an otherwise very complacent market (particularly if we have a look at AUDUSD). It’s a strange state of affairs – I would suggest there is cause to be careful out there, as something doesn’t add up.
Economic Data Highlights
Australia Jul. Westpac Consumer Confidence out at 99.1 vs. 95.6 in Jun.
Japan Jun. Machine Tool Orders out at -15.5% YoY vs. -3.0% in May
Canada May International Merchandise Trade out at -0.79B vs. -0.43B expected and -0.62B in Apr.
US May Trade Balance out at -$48.7B vs. -$48.6B expected and -$50.6B in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
US Weekly DoE Crude Oil and Product Inventories (1430)
US Fed releases FOMC Minutes of June 19-20 meeting (1800)
New Zealand Jun. Business PMI (2230)
New Zealand Jul. ANZ Consumer Confidence (0100)
Australia Jun. Employment Change and Unemployment Rate (0130)
John J Hardy,
SAXO BANK