The Week in Retrospect
A synopsis of the past week serves as a fitting reminder of the old adage 'plant an expectation; reap a disappointment.' Global markets had pinned hopes of new policy easing initiatives from both the United States and Euro area, but once again walked away suitably disappointed. While the respective statements of the FOMC and ECB meetings may have kept the 'policy easing' dream alive, the immediate response across risk related assets suggested leaders had once again failed to deliver the crisis response markets were positioned for. Nevertheless, a post mortem of the ECB's policy meeting appears to have - to a degree - inspired some residual positivity, with many pundits considering the resumption of the ECB's bond buying program a credible plan amid persistent opposition from the Europe's flagship economy, Germany.
The US Dollar was relatively unchanged on the back of Bernanke's remarks and data releases. Bernanke has been speaking regularly with pretty much the same theme which is Fed's pledge to keep stimulus at record levels even after the recovery gathers strength, for a considerable period after.
In short, the ECB may intervene in debt markets with a focus on shorter-term maturities, but only in conjunction with Europe's rescue fund, the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM). To qualify, a country must first seek financial aid and meet "strict and effective conditionality in line with the established guidelines." Whether or not this is a 'game changer' remains to be seen, but what is clear the conditional terms in which a country needs to meet to quality for joint ECB/EFSF bond purchases, remains a primary stumbling block, as markets continue to punish Spanish and Italian debt markets - both of whom at present do not qualify for the intervention program. For now, the outcome for countries such as Spain and Italy will be contingent on the residual support provided from nations who may qualify for support, namely Greece who is currently being assessed by the Troika to see existing bailout terms have been met. After an immediate negative reaction, Friday's moderate decline across bond yields and support for the Euro suggests a degree of solace surrounding the ECB's latest effort. But with the finer points yet to be announced, any optimism mustered across global markets is tentative at best.
The latest U.S employment report also proved to be a positive backdrop for global markets on Friday with the U.S economy adding 163,000 new jobs in July, outpacing expectations of 100,000. The report also showed June's payrolls - originally reported at 80,000 - were revised lower to 64,000, while the unemployment rate unexpectedly edged higher from 8.2 to 8.3 percent. Given investors were positioned for less growth, the jobs numbers gave markets a significant boost with the DOW and S&P finishing up 1.7 and 1.9 percent respectively, while helping risk currencies to pare Thursdays losses.
A$ finds form on rebounding risk trends; RBA policy decision in focus
The RBA policy decision will take the stage early this week, which is expected to official interest rates remain on hold at 3.5 percent. Despite the persistent threat of 'Euro-geddon', on balance local conditions have been supportive, with a recent string of better-than-expected economic feedback likely to see Stevens and Co hold the cash rate steady, and maintain their 'glass half full' stance. Last week's data showed promising signs of a housing recovery with new home sales, building approvals, and house prices outpacing expectations, while retail sales activity also rose beyond expectations. While it's true subdued inflationary pressures may provide ample breathing space, barring an abrupt south-bound shift in global conditions, it's unlikely the board will take rates deeper into accommodative territory in the near-term. Less-than-inspiring local employment conditions remain an exception to the overall buoyancy seen from other macro releases, with June's statistics showing losses of 27,000 jobs with the official unemployment rate ticking higher to 5.2 percent. This week's employment report is expected to see the Australian economy create 10,000 new jobs with the official unemployment rate to edge higher once again from 5.2 to 5.3 percent. Also of particular interest for A$ traders and global investors alike will be the latest round of data from China, with CPI, PPI, industrial production, retail sales, and fixed asset rural investment on Thursday's docket, followed by trade balance data on Friday. This will be watched closely to gauge near term prospects of further easing.
Euro makes a comeback. A meaningful correction or rally of little substance?
This week's Euro-Zone docket may not carry the same degree of event risk as recent days, but with the finer points of Draghi's latest policy initiates yet to be unveiled, the usual wave of rumor, innuendo, and headlines, will undoubtedly remain a key directive for the Euro. Early in the week the release of Italian GDP will closely watched with Europe's largest economy Germany also the centre of attention, with data on factory orders, trade balance, industrial production, and CPI due for release. The post-ECB negativity was partly unwound on Friday as markets digested the implications of the central bank's latest effort while U.S markets rallied on stronger than expected jobs data, in turn providing headwinds for the greenback and sending the EURUSD pair to highs just shy of $US1.24-figure. Price action suggests moderate optimism on possible ECB initiatives have crept back in, albeit, downgraded from previous sky-high expectations. This moderation in expectations implies current levels are more sustainable than the pre-ECB hype that drove the EURUSD pair to similar highs. While we can establish the Euro has a slightly stronger foundation than in recent weeks, we can still classify Friday's strength on expectations rather than concrete action. What we do know is countries such as Spain will not qualify for ECB/EFSF bond purchases in its current form unless they formally seek a bailout. This implies before they can reap direct benefits of the ECB/EFSF intervention program, they must first join the ranks of countries such as Greece and march to the beat of the Troika - at the expense of their fiscal sovereignty.
Greenback at the mercy of Euro-centric risk trends/QE speculation
Last week saw a hybrid of risk trends and stimulus expectations once again guide the U.S dollars fortunes, but despite a short-term revival on FOMC disappointment, the greenback unwound impressive mid-week gains to finish moderately lower against major counterparts. Notably, Friday's better-than-expected payroll data failed to impact positively on the greenback, suggesting that while the data was encouraging and warranted a rally across risk assets, it was not good enough to promote a material shift in stimulus expectations. True to form, QE3 speculation will remain a driving force behind the greenback this week with Fed Chairman Ben Bernanke due to speak on Monday and Tuesday. From a macro perspective it's a fairly light week, but there's little doubt the constant headlines firing from across the Atlantic will continue to govern risk trends, in-turn the appeal of the U.S dollar.
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