Outlook:

The fiscal cliff is the main topic of conversation these days but it’s too soon to guess what each side is going to do. Arguments are hot and heavy. The NYT’ Op-Ed contributor Krugman says the tea party conservatives are hypocritical and incoherent. House leader Boehner may fall prey to the same incoherence as Romney did every time he tried to be reasonable. Congress returns tomorrow, sigh. Somewhere there has to be a compromise between fiscal sanity and not gutting the social safety net. We wish there were a real fiscal conservative in here somewhere. 

Into this blank spot comes the Greek crisis. The Greeks did what they thought the troika asked them to do—slash spending—but now they are betrayed by the EU unwilling to release the bailout funds. Greece needs €5 billion on Friday and this has been the target for many, many months, so the word “betrayal” is not really false. The FT says Greece will kick the can down the road with a bill offering tomorrow that the banks can buy up to about €3.5 billion and the remaining €1.5 billion could be pilfered from the bank recapitalization fund. 

Paying long-term debt with short-term money and re-purposing funds are not exactly top-level management practices, but neither is promising a bailout by a specific date and then reneging on the promise. We have known about the inadequacies of Greek governance for some time but now the inadequacies of the EMU are in the spotlight. It’s hard to have faith in these people. It’s hard to see how the euro can be favored under these conditions, either, but watch out—a last-minute deal of some sort could trigger a relief rally. Besides, the EC has promised the money, just not this week. 

On the data front, it’s a big calendar this week. Of a long list of releases, some of the important items are the German ZEW economic sentiment indicator (tomorrow), US retail sales and the minutes of the last FOMC on Wednesday, and CPI, Philly Fed, and GDP for Spain, Germany and France on Thursday, along with EMU CPI. Friday we get the Treasury report on capital flows. 

The more important items include the President’s press conference on Wednesday that is expected to set out the Administration’s fiscal plan. We also have a slew of Fed officials giving speeches—Lacker, Fisher, Plosser, Lockhart. On Friday Pres Obama meets with the Congressional leaders about the fiscal cliff. 

By Friday we will know what Greece is doing and will also have a pretty good idea about how the fiscal cliff resolution is going. If past is prologue, we can expect Greece to squeak by, somehow, and besides, the bailout is going to happen—just not this week. We can expect Congress to display the same recalcitrance and pigheadedness as before. The only real unknown is whether the traditionally wussy Dems, including Pres Obama, have a gutsy tactic or two up their sleeves this time. A pox on both their houses. We actually think a deal will get done of some sort, no doubt suboptimal but at least providing “closure.” For the FX market, though, the removal of a negative is not a positive—the dollar will not rise on news of a deal, it just won’t fall.

The EMU sanity check:

  • The IMF predicts a 80% probability of eurozone recession in 2013. The European Commission cut its eurozone growth forecast to 0.1% in 2013 from 1% in May. German growth was cut in half to 0.8% from 1.7%.
  • The WSJ estimates capital flight/deleveraging credit contraction by $2.8 trillion in assets by end-2013
  • German thank-tank forecast EMU growth at -0.5% this year and +0.1% next year.
  • S&P cut Spain's rating two notches to triple-B-minus, one step over junk, and Moody’s has the same rating (Baa3), also one notch over junk. Moody’s cut the ratings of half the Spanish regions. S&P cut the SocGen rating by one notch and issued a negative outlook for the other two big French banks on deteriorating conditions.
  • The EU banking supervisor will be established by year-end but may not have the authority to recapitalize the Spanish banks for another 6-12 months.
  • Greece needs the additional €30 billion in bailout money. The deadline is a bond redemption on Nov 16.


SPOTCURRENT POSITIONSIGNAL STRENGHTOPEN DATEOPEN RATEPOSITION GAIN/LOSS
USD/JPY79.41LONG USDSTRONG10 /17/1278.710.88%
GBP/USD1.5899SHORT GBPWEAK11/05/12 1.59780.49%
EURO/USD1.2709SHORT EUROSTRONG11/05/12 1.27980.70%
EURO/JPY100.95SHORT EUROWEAK11/08/12101.710.75%
EURO/GBP0.7994SHORT EUROWEAK 11 /06/120.80010.09%
GBP/JPY126.26LONG GBPWEAK10 /18/12128.04-1.39%
USD/CHF0.9481LONG USDSTRONG11/05/12 0.94280.56%
USD/CAD0.9990LONG USDWEAK10 /04/121.02291.29%
AUD/USD1.0434LONG AUDSTRONG11/07/121.0453-0.18%
AUD/JPY82.87LONG AUDSTRONG10/17/1281.192.07%
USD/MXN13.1907LONG USDSTRONG10/31/12 13.03751.16%