- Risk rally built on shaky grounds; we remain cautious
Yesterday’s rally is perhaps best characterised as a combination of positioning and a small dose of glass-half-full optimism. Certainly there was some good news: the passage of the Greek property tax; and of the EFSF reform bills by Austria and Slovenia; Finland is expected to follow today. And indeed there was a positive tone out of the Merkel-Papandreou meetings. While none of these was an unexpected surprise; there was no denying the strength of the rally, as European stocks soared, and financials outperformed. But against those positives, there were also not a few negatives. The EIB has quashed speculation about its involvement in a SPV scheme; while German FinMin Schaueble has called the EFSF leverage proposals ‘silly,’ saying that any such scheme would endanger the ratings of other Eurozone states. Ultimately, the risk rally ran out of steam late in NY on the back of an FT article detailing a division in the Eurozone over the terms of Greece’s second bail-out; this reaction provides further support to our view that without solid evidence of progress towards a comprehensive solution, we remain cautious on risk.
- Further discussion to wait till after German vote
Comments from French PM Fillon hint at a level of restraint in discussions of new EFSF plans ahead of the Bundestag vote tomorrow. While passage is assured given the support of the opposition, Chancellor Merkel’s coalition is looking increasingly fragile, and loose talk of EFSF expansion patently does not help the cause. As such, further details of any plan may be unlikely until after tomorrow’s vote. Thereafter, we expect more positive noises in the run-up to next week’s EcoFin, even if disappointment still seems the most likely outcome there. Clearly we expect more volatility in the days ahead, but in EURUSD those moves should be confined to the recent 1.3360-1.3660 range.
- JPY set to move after month-end
Despite the market turmoil elsewhere, USDJPY has been confined to a 102-pip range for the past two weeks. With today the last trading day for regular spot settlement before half-year end, exporters were offering heavily into the fix, but the pair remains unmoved. The authorities are likely to continue to try to ensure the pair ends the period above the 76 level. Beyond month-end we see the pair breaking lower, but in that view we are far from alone, suggesting potential for a squeeze higher first. We suggest selling on any rally towards the bottom of the daily cloud at 77.40.
- Bernanke’s speech today to be gleaned for hints of more QE
Turning to the US, Fed’s arch-dove Lockhart noted that the “transmission mechanism for monetary policy remains somewhat impaired”. His comment may imply that expectations of the impact/effectiveness of monetary policy action may have weakened, but that monetary policy accommodation is still effective. Fed’s Lockhart said that cutting the IOER may still be on the table. Meanwhile, Fed’s Fisher, stated that the Fed was not out of bullets and needs to use its “awesome powers” sparingly. The focus today will be on Chairman Bernanke’s speech, which, while not directly involving monetary policy, will be followed by a Q&A session. Markets will be looking for any hints of more QE. On the data front, US durable goods is expected to weaken as deteriorating manufacturing conditions will pull core durable goods orders down.
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BNP Paribas
Corporate & Investment Banking