- USD retraces lower and equities recover in Europe, but sentiment still fluid:
The dollar softened in the European session with the move being linked to selling by Asian accounts. Equities have rallied however sentiment remains fluid. Further negative headlines surrounding the European banking sector could see liquidity tensions exacerbate. The 3-month EUR xccy basis swap has already widened out once again. The German ZEW fell less than expected on both current and expectations measures. However, easing pipeline inflationary pressures (German PPI moderated sharply in August) support our economists call for the ECB easing policy in the months ahead. Today’s Riksbank meeting minutes were also rather dovish, noting considerably uncertainty over global growth, playing to our economist’s view that the Riksbank will cut rates by 50bps in the months ahead. In contrast, while the RBA minutes release today was not that dovish. While suggesting the board had moved away from discussing tightening policy, they still noted pockets of resilience referring to still stellar terms of trade.
- EUR hurt in Asia after S&P downgrade; Focus on second Greek teleconference call:
The EUR was under pressure with risk markets selling off in the Asian session following news that S&P had downgraded Italy by a notch and keeping the outlook negative. The move was a surprise with the markets having anticipated a Moody’s downgrade in recent weeks. S&P cited weaker growth prospects for Italy and the fragile economic coalition/policy differences within parliament that limits the government’s ability to respond decisively. The agency also doubts that the planned EUR60bn of recently agreed savings will come to full fruition. Italy’s industrial orders release-showing much weaker growth over June and July- underscore fragile growth which play to this more negative view. The rating action will raise the stakes ahead of the second Teleconference call between the Greek Government and the Troika today (1700 GMT). While yesterday’s initial call suggested that the two sides were closer to an agreement to unlock the next tranche of assistance by October, any signs of an impasse could put further pressure on the EUR and risk markets more generally.
- FOMC begins. US housing data due:
President Obama’s $3.6bn 10-year deficit reduction plans unveiled Monday afternoon failed to resonate. With nearly 50% of savings expected to be generated from additional taxes on the wealthy, eliminating many tax deductions on higher income earners (and too tax breaks for energy companies) this drew immediate scepticism of having much hope of forming the substance of a bipartisan deal. The FOMC meanwhile commences its two day meeting and will probably devote significant discussion to the Europe situation. Beyond the now consensus expectation of ‘Operation Twist’, the Fed will need to hold out the hope of further actions if risk appetite is to stand much chance of improving out of the FOMC but which will also needs to be allied with better news out of the Eurozone. US August housing starts and building permits are due today.
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