The extent of wishful thinking about the Spanish bailout application is seen in markets continuing to gyrate long after the Rajoy denial. Analysts say the bailout, and the test of the ECB’s bond buying plan, are the “next catalyst.” At a guess, Moody’s holds the fate of the Spanish 10-year yield and possibly the euro in its grubby hands.
Today we get the service sector PMI, probably not a catalyst for anything, expected down to 53.4 in Sept from 53.7 in August, according to the Bloomberg survey. So far this time the obsession with payrolls is not dominating the news, but just wait—we get the ADP private sector estimate today. We can expect nothing but choppiness as the week progresses.
Again we have to complain about inappropriate and unrealistic valuations for risk. Evidently the lesson from the canary in the coalmine, the Australian dollar (and its cousin, the NZD) is not being learned in a wider context. The AUD has now fallen from 1.0845 on Feb 8 to a low of 1.0167 on Sept 5, albeit not in a straight line. As of today, the low is 1.0199 and clearly headed for a test of the Sept 5 low, with some analysts predicting parity again. This is down to global recession, especially the Chinese slowdown, exacerbated by uncertainty over the political situation in China that has brought official responses to the slowdown to a grinding halt until after the Party Congress in early November. This is no way to run an economy, especially one that aspires to international leadership and reserve currency status. The cat laughed.
We see nothing on the nearby horizon that promotes hope of good outcomes, perennial wishful thinking about the euro notwithstanding. Greece has some decent leadership at last but the situation is all but hopeless. Spain has important hurdles both domestic and eurozone-wide to jump or evade, including the EC and ECB evidently wanting a bailout but Germany balking, and not just out of pique and petulance—a legal challenge is still a possibility. We still don’t know whether the ESM is being formed at last and whether it will be leveraged. Any sane and rational overview has to call for the euro to fall, although good US continues to make the world safe for risk-taking. We’d say the euro is getting riskier by the minute, with the main parties buying-on-dips reported to be Asian sovereigns. This is not intervention but a distant relative. Another real problem will emerge if risk-off becomes the flavor of the day—the yen will rise, again, to the intervention zone. At what point do the Japanese reach a tipping point? Watch the Nikkei for that.
On the whole, we can easily imagine the euro rising on unjustified hopes or falling on appreciation of possible disasters looming. That’s the problem—it has become a coin-toss and the charts are only compounding the issue, not clarifying it. We have seen this configuration of indicators before and half the time we get a recovery and half the time we get a rout. Keep your powder dry.
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