Patience Wearing Thin as Spain Drags Heels on Bailout

The Euro appeared somewhat rejuvenated over the past week, despite what appears to be reluctance from Spain to make a formal request for financial aid. Although the Government appears to be dragging its heels on an eagerly awaited request, market perception over the likelihood of such an event has placed a floor on the Euro in recent sessions. While it true ECB President Mario Draghi's crisis fighting armory has given the euro region a fighting chance, Spain remains a critical piece of the puzzle left to be solved. At last week's ECB press conference, Draghi made it abundantly clear the ball is firmly in Spain's court, stating, "We are ready to activate bond purchases and we have a fully effective backstop. Now it's in the hands of governments." In short this means before qualifying for the ECB's Outright Monetary Transactions (OMT's), a country such as Spain will firstly be required to seek financial aid and abide by an agreed set of conditions. While a "full macroeconomic adjustment program" (à la Greece, Portugal and Ireland) may not be required, countries such as Spain are encouraged to take a watered down version of a bailout, or a "precautionary program." This program may carry less stringent measures allowing a country to retain a larger degree of autonomy. 

Meanwhile, markets are now left to sift through a trickle of feedback from Spanish officials in an effort predict their next move. Investors are hoping Spain's budget reforms and bank stress test report released last week will pave the way for a formal request for financial aid, both of these a considered critical housekeeping before financial assistance will be requested. Last week Prime Minister Mariano Rajoy rejected reports a bailout is imminent, while Deputy Economy Minister Fernando Jimenez Latorre has said "we are analysing the options." Economy Minister Luis de Guindos took it a step further on Thursday stating Spain "doesn't need a bailout at all." What we do know is we're unlikely to see an extended period of inaction sail past unnoticed, leaving a couple of scenarios. Either Spain goes quietly or they're pushed. The latter implies a period of heightened adversity, were Spanish debt markets are punished until Spain succumb to market pressure, which of course carries a significant risk of a Euro reversal. Euro region macro directives this week will see a host of German economic feedback on the agenda with trade data, Industrial production, CPI on the docket. The ECB's monthly economic report is also scheduled for release on Thursday.

The local week ahead will see the focus turn to the September jobs report which is expected to show a net gain of 5,000 new jobs added to the labour force. Despite a net loss of 8,800 jobs in August, the official jobless rate edged lower from 5.2 to 5.1 percent, this fall is expected to be unwound this week with estimates showing the rate probably increased to 5.3 percent.

Although domestic factors remain conducive to currency weakness, the Aussie dollar's risk credentials as a high yielding currency remain firmly intact, rendering the local unit at the mercy of global risk trends in addition to local directives. Markets will remain transfixed on both sides of the Atlantic to look for the next economic signpost or event to provide the path of least resistance. US corporate earnings will also be closely watched with Alcoa Inc marking the official start to the earnings season on Tuesday. While the US data pulse will remain a strong directive, there's a lighter than usual amount of top-tier event risk in the week ahead with the trade balance, Fed's Beige Book, PPI and University of Michigan consumer confidence data the key data releases in the frame.