A much needed quiet Monday morning allows for a rundown of the major happenings in the markets. PMI surveys from Europe and the Bernanke speech at Jackson Hole highlight the week. European politicians don’t seem to be on the same page while traders are anticipating further action from Japan.
Market sentiment is currently in the dumps when a 1.50% decline in the S&P is considered a calm day. Fear of a double dip recession in the US and a dramatic slowing of growth in Europe have fueled an equity sell-off across global bourses. This morning European equities have stabilized somewhat today with the FTSE 100 up 1.59%. The ECB continues to buy the sovereign debt of Italy and Spain and has succeeded in stabilizing the falling euro zone bond market. A total of EUR 22 Mn has been purchased. Both Italian and Spanish 10-year yields have fallen below 5% though the Greek 2-year spread over the equivalent German bund has ballooned this morning.
Despite the mixed fixed income market the euro continues to be well bid with the EUR/USD rising above 1.4425 earlier today. Last week’s high of 1.4515 is the initial test and could provide a potential selling opportunity as the euro zone politicians continue to talk down the idea of euro bonds. Tomorrow’s PMI surveys will be the first glimpse into euro zone Q3 GDP. At the 2nd half of the year expires the growth appears to be slowing just as higher ECB interest rates are taking effect, something that will likely further reduce aggregate demand. The recent struggle to secure additional Greek funding that was agreed upon on July 21st may weigh on the EUR. Support for the EUR/USD comes in at 1.3450 followed by the bottom of the triangle pattern which comes in at 1.4200.
This week the Troika, a combination of the IMF, EU, and ECB, will visit Greece to weigh the progress from the austerity program. The approval by the Troika is key to Greece receiving its next expected tranche of aid. Should Greece show a lack of progress regarding growth and budget cuts this could undermine the fragile state of investor confidence and send the market looking for safe haven assets. This makes for a good segue into our next topic.
Japanese government officials continue to jawbone the yen lower but have had little success. Prime Minister Kan said the government will take action in the FX markets when necessary and Finance Minister Noda said the price moves of the yen if they continue could have a negative impact on the economy. Rumors of sizable retail forex trading positions in have been built in favor of additional intervention while positions in this week’s CFTC data show only a slight increase in long JPY futures market positioning. The risk is for Japanese officials not to act and when the next crisis comes around investors seeking safe haven assets will push the yen higher.
This week’s highlight is the two day economic summit in Jackson Hole Wyoming with the keynote speaker Ben Bernanke . The Fed chief has a lot to live up to as in the previous year he announced QE2 at Jackson Hole which helped to spark a dollar sell-off that continued through May. Expectations are for the Bernanke to leave the door open for more quantitative easing but the risk is for Bernanke to disappoint markets given the increased inflation levels. I’m skeptical of the Fed’s ability to increase its bond purchasing program for fear of losing control of inflation. Additional commentary will follow leading up to Friday’s main event.
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