- Fitch pulls the rug from payrolls rally; Merkel-Sarkozy delivers little, but tone sees market retain optimism:
A better than expected September US payrolls report took risk up and the dollar further down Friday, EURUSD making a new weekly high above 1.3500, only for the move to be more than reversed by Fitch’s ratings actions against Italy and Spain. Moody’s action on Belgium (now on review for downgrade), linked in part to the expected cost of supporting Dexia’s Belgian operations, added further weight just ahead of the NY close. Fitch’s downgrade of Italy, by one notch to A+, still leaves their rating above the equivalent Moody’s and S&P marks. But the two-notch downgrade to Spain makes their AA- ranking the new low water mark among the three main agencies, one notch below both Moody’s and S&P. It was the latter than did most of the damage, taking the dollar back up through pre-payroll levels. However, yesterday’s Merkel-Sarkozy meeting has managed to reassure markets that the Eurozone’s two key powers are working towards a solution. While the leaders failed to disclose any more details of plans to address the banking-sovereign dual debt crisis, they have publicly signed up, in Sarkozy’s words, to “comprehensive, sustainable and rapid responses before the end of the month.” The G20 meeting in Cannes remains the focus for a solution, but that in turn suggests a need for progress heading into the G20 FinMin meetings at the end of this week. The market thus has managed to retain the optimism of last week, but any signs this week that the gap between the French and German positions on bank recapitalisation remains unbridgeable will trigger another leg lower in EUR and risk currencies.
- US data flow suggests November is too soon for QE3; FOMC minutes key this week:
The improvement in US data flow in the past week – at least relative to expectations – now suggest that the economic cover the FOMC will likely need to enact further easing in the form of QE3 will not be to hand as early as the Nov 01-02 meeting. Thus December 14 now looks like the earliest time to expect this, but we should learn a lot from Wednesday’s minutes from the September FOMC meeting. These may not be quite the August 2010 Ben Bernanke Jackson Hole ‘smoking gun’ affair that puts the market on the scent of QE3. But if it transpires that fresh balance sheet expansion was actively discussed and not rejected out of hand, it will strengthen our conviction that if the economic news deteriorates as Q4 progresses, the Fed will be prepared to puff up the balance sheet once more.
- GBP defies its critics but IMM data offers clues as to why:
No sooner had the long CAD leg of our short GBPCAD portfolio been given some love from Friday’s much stronger than expected Canadian September employment report, than GBP once again defied its critics, strongly outperforming all its G10 peers. GBPUSD ended NY trade +0.75% on the day. While we did hear of some ‘must do’ real money demand for Sterling, its overall performance was undeniably impressive on a day when Moody’s downgraded a dozen British banks and a prediction that BoE QE could extend to GBP500bn did the rounds. A glance at Friday’s IMM positioning data on GBPUSD (see Chart) tells a revealing tale here. Net short speculative positions in the week through last Tuesday were the biggest since mid-2010. To the extent this is reflective of broader speculative positioning, it suggests that despite limited expectations for QE heading into the latest BoE MPC meeting, many had short positions on ‘just in case’.
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