“Life is about timing” – Carl Lewis
Australian GDP data overnight was higher than expected with the Q3 growth comparison rising 1.0 percent from the previous quarter (+2.5% year on year), in addition to an upward revision to the Q2 data itself. The data, and the timing, perhaps flies in the face of yesterday’s 25 basis point rate cut from the Reserve Bank of Australia, indeed the market is still fully pricing in a further four 25 bp cuts over the course of a year, however, it probably does highlight the reliance of the prosperity of the Australian economy on the prosperity of the Chinese economy (China’s Commerce Ministry announced a “severe export situation in 2012” last night). In addition to this the Asian Development Bank (ADB) suggested yesterday that the Eurozone situation is starting to have a negative impact on Asian growth. It is therefore also possible that the RBA, who does not have another official monetary policy meeting until February, decided that prudence in such uncertain times when inflation has fallen back significantly, is the best policy.
This brings us back to the core focus of financial markets – the Eurozone and this week’s EU summit. European Commission President Herman Van Rompuy stated yesterday that “most countries will not get a vote on tighter fiscal integration”, seen possible as Van Rompuy advocates the fact that by changing protocol 12 of the EU treaty (relating to excessive deficits), the proposed changes “do not require ratification at national level. It is perhaps ironic therefore that the two states which were instrumental in the ‘bending’ of the 3 percent deficit to GDP Maastrict criteria rules at the outset of the crisis, are the same two that are calling for tougher (automatic) punishments for those who do so in the future.
This is where the significance of the treaty change comes in. In essence it is assumed (hoped) by Eurozone officials including Van Rompuy that the treaty changes will give the European Central Bank the confidence that it needs to give more support to weak banks and governments on the basis of enforced fiscal restraint. Whilst this is potentially a boost to confidence and risk assets in the very short term, the likelihood of a ratification of the proposed treaty change before the end of March 2012 is very unlikely. As I suggested in yesterday’s blog France alone has EUR126 billion of maturing debt before that point. Timing as they say… is everything.
ECB data shows that confidence in the interbank market is still languishing at the lows with this morning’s data continuing to show that banks are very happy to place surplus overnight funds on deposit at the ECB, earning just 0.75 percent (to the tune of EUR324.6 billion) rather than lend those funds at significantly higher rates on the interbank markets. Perhaps more enlightening of the current funding stresses within the Eurozone banking system the ECB states that banks borrowed EUR8.1 billion at the marginal rate of 2.00 percent.
In this regard today’s USD tender from the ECB (10:00 GMT) will be important in gauging the impetus of the concerted action led by the US Fed to lower the cost of USD funding by cutting the swap rate last week. Many commentators are expecting a take up in the region of USD100 billion and while this may provide further indication of the level of stress, a number this large also suggests that banks are taking advantage of cheap funding and hence will likely be viewed as positive for risk and risk assets at this uncertain juncture.
SAXO BANK