A series of negative themes continued to pressure global markets overnight with short-term risk trends favouring the perceived safety of the US dollar and Yen. Despite recent stimulus efforts by central banks from both sides of the Atlantic to shore up confidence, growth remains a key point of contention for global markets.
Investors initially responded to disharmony between Germany and France over how soon a Banking Union could be implemented. Over the weekend French President Francois Hollande said “the earlier the better” while German Chancellor Angela Merkel appears to be taking a more measured approach stating “it has to be thorough, the quality has to be good and then we’ll see how long it takes.” Europe’s Banking Union is designed to immunise sovereign nations against the threat of a break-down in respective banking systems, which places financially strapped nations such as Spain at risk of fully fledged sovereign debt crisis. Concerns over the growth prospects of the Euro region were compounded after the German IFO business climate gauge fell to lows not seen since early 2010. Meanwhile, Greece continues to bubble away in the background as investors wait in anticipation for a troika report which will ultimately decide if Greece will receive its next bailout installment. There’s some speculation the report won’t be released until after the U.S elections in early November to avoid placing Obama’s re-election hopes in jeopardy in the event of a market meltdown.
Spanish bond yields were driven higher amid reluctance from Prime Minister Mariano Rajoy to formally request a bailout which threatens to place his own political fortunes in danger ahead of a regional election on October 21. It’s clear Rajoy is facing an extremely difficult decision between easing the financial burden by requesting a bailout, and the effective loss of sovereignty given the strict conditions attached. For now it appears Mariano Rajoy is taking it all in his stride, but markets will be transfixed on possible outcomes, in-turn a key directive for the Euro.
The Euro continued to reflect this hybrid of negative themes overnight briefly falling below 1.29-figure before finding moderate support in US trade. The greenbacks safe-haven credentials kept it buoyant against major counterparts with the Kiwi leading risk currencies lower. After falling to lows of 103.85, the Aussie dollar was able to muster some strength over the course of the U.S session, once again making a break to the upside of 104-figure. Interest rate conjecture dragged the Aussie dollar lower yesterday after Treasurer Wayne Swan handed down the final budget outcome for the 2011/12 financial year, which showed falling commodity prices and tax receipts may hamper his efforts to return the economy to surplus this year. Local markets will continue to focus on the RBA’s next move today with the Financial Stability Review scheduled for release 11.30 AEST, at this same time RBA Assistant Governor (Financial Markets) Guy Debelle will be speaking in Melbourne. There’s a valid case to suggest the RBA may on the cusp of easing interest rates, and market will be focused on both events for further evidence the RBA may decide to do so when they reconvene on October 2. At the time of writing the Australian dollar is buying 104.25 US cents.
