'Fiscal cliff' concerns infiltrate market psyche
Following on From Wednesday's slide, US equities remained heavy overnight with fiscal cliff concerns once again in the spotlight. In the wake of Obama's re-election, concerns surrounding the government's ability to establish a consensus with the Republican Party over the impending fiscal cliff, is weighing heavily on investor sentiment. Obama's Democrats may have boosted their numbers in the senate, but the Republican Party retained their majority in the House of Representatives, paving the way for an elongated period of political brinkmanship markets have become accustomed to in the 2011 debt ceiling negations. Economic releases overnight showed the number of US citizens applying for unemployment benefits dropped to 355,000 in the week ending November 3, from a previous 363,000. Economist's estimates were for a rise to 365,000. The US trade deficit eased to 41.5 billion in September from 43.8 in August.
The DOW and S&P closed lower 0.94 and 1.22 percent respectively.
Euro downside escalates on ECB; Draghi plays waiting game
As widely anticipated the European Central Bank held the refinance rate steady at 0.75 percent overnight. There was little colour in ECB President Mario Draghi's post decision address, who said risks to Euro region growth remain to the downside, with some corners of the market interpreting Draghi's dovish demeanor as an indication a rate cut is on the cards. "The ECB is by and large done," Draghi said in reference to a question on what more could the bank do to help Greece.
On Spain, Draghi has made abundantly clear the ball is firmly in their court, and offered no assurances over the scale of bond purchases (Outright Monetary Transactions) should Spain make a formal request for financial assistance. "We are ready to undertake OMTs which will help to avoid extreme scenarios, thereby clearly reducing concerns about the materialization of destructive forces."
Before qualifying for 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." Nevertheless its clear Spain's Prime Minister Mariano Rajoy won't be handing over Spain's sovereignty unconditionally. In a recent radio interview, Rajoy once again displayed reluctance to formally seek financial aid in exchange for ECB bond purchases, given the questions over the size and scale of the Mario Draghi's proposed scheme. In reference to the yield differential against German bunds, Rajoy noted a bailout will be contingent on how much the risk premium will come down, implying the terms need to be more attractive before considering a bailout. "If it only serves for the premium to stay at 400 and not come down to 200 then obviously that's not the same thing," Rajoy said.
The Euro slid to a fresh two-month low in the ensuing period, falling to 1.2716 against the greenback, and a deeper trough to lows of Y101.02 against the Yen. Bearish momentum appears to have set in for the Euro with a break to the downside its two month long range between $US1.28 and $US1.32 suggesting further losses may be on the cards. A bittersweet concession to broader negative themes was a win for budget cuts in Greece. Parliament voted in favor of budget cuts valuing 13.5 billion euros over the next two years, opening the door for Greece to receive critical funds to pay maturing debt. Before the next 31.5 billion tranche of the total 240 billion bailout package can be unlocked, Greece must first pass the 2013 budget on Sunday. Still, with the country mired in debt with a quarter of the population unemployed, there's little to rejoice about. Demonstrators have once again clashed with police in protest over the new range austerity measures made up of tax hikes, public sector job cuts and an increase of the retirement age.
A$ succumbs to market negativity; markets look to China to counter the trend
After yesterday post jobs data rally, the Australian dollar eventually succumbed to broad risk aversion overnight, with negativity from both sides of the Atlantic prompting a return to the safe haven units, the greenback and Yen. Still resilience remains common theme for the Aussie with markets suitability pairing back rate cut expectations after yesterday's employment data. The Australian economy created 10,700 new jobs in October according to the latest data from the ABS, with the official unemployment rate remaining steady at 5.4 percent. Economists anticipated a net 500 new jobs and the unemployment rate to edge higher to 5.5 percent. All things considered the Aussie has had a solid run in the face of broader global uncertainty, with a deeper trough noted from commodity counterparts the Kiwi and CAD overnight. After peaking at 104.44 US cents, the local unit is currently testing 104-figure ahead of closely watched economic feedback from China and the RBA's Statement on Monetary Policy. Chinese inflation data will headline today's docket which is expected to see consumer price growth of 1.9 percent in yearly terms. Later this afternoon China will also release data on industrial production, retail sales, and fixed asset investment.