Like anything that has spent a full day at full speed, the markets are in need of a breather from making new highs. Equities and the euro, the main beneficiaries of the improved sentiment provided by the Fed’s latest QE plan, made good gains on Friday and have started this week higher as well. The key with these policy initiatives is continuation following the initial market reaction and traders will be looking for signs that momentum could already be beginning to wane.
As we said on Friday, now that the initial event risk of the recent central bank meetings has been passed, the market will now begin to look at fundamental data a lot closer than it has been in recent months. Focus will once again shift from the US economy and back to that of the Eurozone.
The country that will garner the most headlines in Europe remains as Spain. The Dutch Finance Minister reiterated his government’s position over the weekend that Spain needs to ask for help sooner rather than later. Protests in both Portugal and Spain at austerity measures are more of a weight on Spanish leaders’ minds at the moment. A lot of the heavy lifting has been done already by the ECB with the immediate danger from exorbitant bond yields over for now.
As we have said many times, the ECB is happy to purchase the debt of these peripheral nations on the proviso that they take additional bailout funding and austerity. Without that, the pledge to buy debt is worthless, and the transition of power in Europe passes back from the ECB to the politicians; something that lessons from the crisis already can tell us is dangerous in itself.
Greece has gone quiet and will likely remain so until the Troika decision is due in October. The euro received a further fillip on Friday following comments in a Eurogroup press conference that Greece would be allowed more time to reach its targets. This is, in our eyes, not about Greece but about further time being needed to protect the rest of the Eurozone from a Greek exit. Our timetable to a Greek exit still remains as 12-18 months and we cannot see a scenario that would see Greece benefiting from remaining within the single currency.
Early flows this morning seem to suggest that we will see the recent EUR strength vs USD weakness matrix continue through today given the lack of real tier 1 data on the calendar, although a pullback would not be a surprise. The docket does hot up as we move through the week with UK inflation and German ZEW (tomorrow) and the Bank of Japan rate decision, EZ PMIs and UK retail sales (Thursday).
Latest exchange rates at time of writing