TRADERS´ Blogs

It’s been another positive day for risk assets as stocks and the euro both extend yesterday’s gains.  Q3 earnings for Johnson & Johnson, Coca Cola and Goldman Sachs all beat estimates. Interestingly, Coke sales advanced by nearly 4% in Europe over the last quarter, shrugging off the sovereign debt crisis and helping revenues to advance to $12.3bn. Coke may not be a perfect barometer of the economic temperature in Europe, but when big blue chip companies perform well it can be good news for the overall market. US stock futures are poised to open higher today.

Risky assets including the euro have started the week on a positive note today and rallied at the European open. There hasn’t been a concrete catalyst as there have been no economic data releases of note during the European session. It seems like FX and stock markets are taking their cue from the bond markets as Portuguese 10-year yields fell to their lowest level since March 2011 at 8.01%. The rally in Portuguese sovereign bond markets comes just ahead of its 2013 Budget, which is presented later today. Lisbon is expected to announce measures to plug its budget deficit next year. A transaction tax and a hike in income tax are some of the changes expected. However, in an environment of weak growth and rising unemployment, which is at a record high of 15%, the budget gap is unlikely to be plugged by hiking taxes alone, thus more spending cuts are also expected to be announced. This could cause social unrest and mass protests are planned for today.

There has been a tug of war today between weak economic data and some slightly more promising signs that Spain could make a request for financial aid in the near-term. The latter has helped to boost sentiment and EURUSD is back above 1.29 as the market seems to be willing to ignore bad economic data after the Eurozone manufacturing PMI rose to a 6^th month high, but remained below the key 50 level for 14 consecutive months. Added to that the unemployment rate remained at a record euro-era high of 11.4% and there are now 24 million unemployed people in the currency bloc. These are the “real” problems that the governments in Madrid, Rome, Paris and Berlin have to deal with at the moment. In Athens the problem is even worse. Its budget has been submitted to Parliament today and the finance minister has estimated that the Greek economy will contract for the 6^th consecutive year in 2013.

There are two things that should be preoccupying the market’s mind this afternoon: 1, how to navigate the global economic slowdown (data out of Europe today was truly horrible) and 2, how to prepare and position oneself for the ECB meeting tomorrow. We may have been given some help for the latter after the proposed ECB bond buying programme was leaked and hit the wires a short time ago. The leak, since denied by the central bank, suggested that ECB President Draghi would unveil an unlimited, programme of bond purchases, however unlike the BOE and the Fed’s unconventional monetary stimulus it would be sterilised – hence the ECB would give money with one hand and take it away from somewhere else with the other. Apparently this plan has support from the majority of ECB members, presumably including Germany, which is the only good thing in the news in my view.

This Thursday 6^th September 2012 the ECB announces its interest rate decision at 1245 BST/ 0745 ET. The market consensus (as measured by Bloomberg) is for a 25 basis point cut to 0.50% from 0.75%. The main event will be ECB President Mario Draghi’s press conference at 1330 BST/ 0830 ET.

The markets seem to be getting a little jittery as we lead up to the ECB meeting and narrow ranges abound. EURUSD gave up the 1.26 handle just before lunchtime in the London session after some news came out that said Spain would inject debt rather and cash into its struggling banking behemoth Bankia. This is a bridging loan before Bankia has access to the EFSF/ESM banking bailout funds of up to EUR100 billion. However, the decision to use debt rather than cash does two things: 1, make Bankia’s debt load worse (could be seen as negative) and 2, preserve much-needed cash for the Spanish government to pay other bills including a EUR20 billion bond redemption that is coming due next month (slightly positive).

Even though the Fed’s Ben Bernanke made an impassioned plea that QE has benefitted the US economy at Jackson Hole on Friday and it would still be his preferred option to try and boost the economy further, risk assets have come off their Bernanke-induced sugar high and EURUSD is back below 1.26 after reaching a high of 1.2640 on Friday. The limited response to Bernanke could be due to 1, the fact he never mentioned when there could be more QE. If we get a strong payrolls number on Friday does that rule out the prospect of more stimulus at the Fed’s September meeting? 2, European concerns have come back with a bang this morning.

The markets have been trading in a fairly tight range today, as one would expect in the lead up to the Jackson Hole conference this weekend. The markets are looking for signals that more stimuli is coming from central banks and hence it’s all about positioning ahead of two major events: 1, Ben Bernanke’s speech at Jackson Hole tomorrow at 1000ET/ 1500BST and 2, the ECB meeting on the 6^th September.

There has been little to move the markets in any meaningful direction this morning apart from two German press articles that caused a bit of movement. The first was an article written by ECB President Draghi who urged the domestic readership to support the euro rescue plan. The second was an article in the highly respected Handesblatt, which suggested that the long-term Eurozone rescue fund already has a de-facto banking licence and does not need agreement from the German Constitutional Court. Why does this matter? Without a banking licence the ESM can’t really solve the debt crisis and keep Italy and Spain out of danger, which could mean the end of the Eurozone. So if Handesblatt is correct then the ESM can get unlimited money from the ECB if the rules are interpreted in a certain way, thus the Eurozone’s periphery could be saved. Does this make the Constitional Court ruling moot, and has Germany signed a blank cheque to save the Eurozone? We need to get more details, but at this stage the answer is perhaps.

This morning’s price action is all about the euro. It bounced back above 1.25, and reached a high of 1.2560 this morning after the Eurozone reported better than expected money supply data for July and Spain sold more debt than it had intended to at an auction this morning. Usually money supply data is not particularly market-moving; however the sharp rise in the money supply suggests that lending conditions did improve in the currency bloc in the three months to July. Lending to households and businesses also rose by 0.1% in July. Although this is fairly weak growth it is better than the contraction we saw in June and May and suggests a slight improvement in position of the Eurozone’s banks’ balance sheets.