Another Summit comes, goes, disappoints

Too little was achieved for investors to buy much European bonds. Euro remains vulnerable.

When all is said and done, this was another under-achieving Summit. Friday’s positive initial reaction to the news that the Euro Zone economies (and the rest of the EU bar the UK) were in agreement to create a new set of binding fiscal rules, has been replaced by despondency. ‘The EU’s enforcement of new fiscal rules is still uncertain, while the bailout fund isn’t much bigger than the prior one’ says the WSJ, ‘Snags, diversions – and the crisis goes on’ says the FT.

Andrew Haldane, the Bank of England’s head of Financial Stability, describes investors as having a ‘pretty chronic’ aversion to risk. Last week’s CFTC positioning data suggests that by this time last week, the degree of risk aversion was actually being reduced somewhat as optimism about the Summit increased. The SG risk sentiment indicator also pointed to less risk aversion. It’s hard to see why anyone would get less risk averse between now and New Year, so euro bounces are likely to be modest, we will continue to watch BTPs, OATs and even Bunds nervously. A break lower in EUR/USD towards 1.3140 is possible, and any Christmas feel-good sentiment will be reflected in a push higher by the S&P index rather than in European currencies.

If there is one currency which reflects feel good rather than risk aversion, it is still the Australian dollar. Retail Asian long AUD positions remain huge and in the longer run, worrying. A slight dip in the country’s trade surplus to AUD 1.6bn in October isn’t a problem, but the currency is very overvalued, the Chinese economy is slowing and the AUD may not be able to resist global risk aversion indefinitely. The level of short-term volatility makes it nearly impossible to trade, but the goal is to find ways to get short.

There is little in the way of data today: US retail sales and CPI data alter in the week, as well as the FOMC meeting (no changes expected), should be a focus. So will UK CPI and retail sales data, and the ZEW survey in Europe. But with politics the driver of risk aversion rather than economics, the calendar isn’t much help. We remain short EUR/GBP and long GBP/CHF.

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Societe Generale
Research & Analytics