German Constitutional Court ruling at 9.00am
Dutch elections in the spotlight
Us credit rating under threat
FX Market Overview
For the most part we were treading water yesterday with markets range-bound ahead of the main events of the week which begin later this morning with the German Constitutional court ruling on the ESM. The judges that make up the court will be looking to rule on whether or not to block the ratification of the Eurozone’s new permanent bailout fund (ESM). The debate lies around whether or not the ESM takes away the German governments ability to control taxpayer funds. The fate of the entire Euro project probably lies in their hands. Most investors believe that the court will not block the fund and that ratification is pretty much a done deal ,hence the rise in risk and the value of the Euro over the last couple of weeks. If they were to vote against ratification then we could see reversal of the recent Euro strength and dollar weakness as risk aversion would surge through currency markets. We await their decision at 9.00AM.
The Dutch election is also taking place today. Like most European governments some sort of coalition is the most likely outcome. Recently it has become apparent that there is little chance of the most Euro sceptic party being involved in government and that there will be a centrist coalition made up of the Labour and Liberal parties. As there is little chance of a single party winning a majority there will be a lot of horse trading and negotiation before a government can be formed.
The dollar weakened yesterday as Moodys announced that its AAA negative outlook rating on the United States will remain in place until budget discussions are completed. Once the elections are out of the way ratings agencies are expecting some action to be taken to reduce the deficit. Talks that fail to find a solution could lead to a sovereign downgrade further dollar weakness.
Elsewhere new BOE monetary policy member Ian Macafferty refused to be drawn on whether he believed more quantitative easing would be needed in the UK. He stated that he would like to see more evidence before making any firm decisions. This sounds like common sense to me but as he is, at the moment, clearly less dovish than his predecessor investors decided that it was a good idea to purchase Pounds. Attention in the UK will be focussed on the unemployment data due to be released at 9.30AM which has remained stubbornly high around 8.0% over the last few months.
Barring any surprises from Germany or Holland we could actually be in for another day of risk being put on albeit in slightly lower volumes as the market looks ahead to Thursday and the announcement from the FOMC. There will certainly be volatility leading into the announcement so please do contact your Halo Financial consultant for some assistance with placing orders.