EURUSD heads higher on bond buying expectations
Spain auction continues trend of falling short-term yields
Samaras to meet EZ leaders over the coming days
Fed minutes due at 19.00, Chinese PMI overnight
It was a perfect storm for those betting against the single currency yesterday as comment, bond auctions and other markets combined to push EURUSD back towards range highs ahead of important political meetings between the leaders of the Eurogroup, Greece, France and Germany over the coming few days.
The rally was started by a ratings agency of all people. Normally the handmaidens of bad news, in this instance they told the market what they wanted to hear in that they believe that the ECB may take action to buy peripheral bonds “without the support of the Bundesbank”. This was following the Draghi press conference that dictated the “whatever it takes” mantra from the Chair. His following press conference stated that bond purchases may come under the Bank’s mandate if it threatened the transmission of monetary policy only reinforced this in Fitch’s view.
This pushed equities, gold, oil and EURUSD higher on a mixture of a liquidity and inflationary pressure spike.
Next, the Spanish auctioned off 12 and 18 month debt and found the market accommodative. Yields were lower and although demand was also slightly down Spain managed to sell more than it initially wanted. This continued the downward trend in peripheral bond yields especially at the shorter end of the time curve. Shorter dated stuff is a better barometer of immediate funding risks than the typical 10yr benchmark, and both Spain’s and Italy’s have seen the yields move lower as the market has come round to the expectation that some form of ECB help will be forthcoming soon.
Samaras will take his request for “more breathing room” to the various real leaders of the Eurozone (Juncker, Hollande and Merkel) over the coming days, and while this is a noble fight, it is the wrong one. As we said on Monday, a new bailout fund will only come with further austerity and this has now become unsustainable for Greece and its people. It has cut as much as it can and any further will be more damaging than recuperative.
As it has been our argument for a long time now, the easing from the ECB and the plans to deal with the debt markets are to help the rest of Europe contain the fallout from a Greek exit. Greece cannot be helped anymore.
Recent market moves and data revisions have caused us to reassess our expectations of further easing from the Federal Reserve. We had initially thought that September would be the month in which the lever would once again be pulled but I cannot see it with the current conditions. The global economy is still very much in the doldrums but has not materially deteriorated since the last Fed meeting. You combine this with the fact that the S&P 500 climbed to its highest level since 2008 yesterday and the argument for easing sooner rather than later further diminishes.
Fed member Lockhart spoke yesterday on monetary policy and warned that it was too “aggressive” at the moment. He is looking for fiscal policy to take the reins as the primary influencer on the US economy. The market took little interest however, as he is widely regarded as the most hawkish member of the committee.
We now see it happening before the end of the year but the chance of some form of co-ordinated action from the world’s central banks has remained stable; a situation contingent on a significant European wobble.
The latest Fed minutes are due this evening and combined with the fact that the S&P made, but was unable to sustain, those 4 year levels does suggest that a pullback of yesterday’s move could be on the cards through today’s session. Tonight’s Chinese PMI figures will also be key for commodity currencies and a poor figure could intensify USD strength.
Have a good day.
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