Schaeuble pours cold water

Market sentiment deteriorated markedly yesterday for the same reason that it improved over the last two weeks – hopes for debt crisis solutions. We reiterated numerously that investors became too optimistic about possible solutions in Europe and that there might not be much behind declarations of determination from Merkel and Sarkozy. Instead of delivering details on new Greek restructuring debt and recapitalization of banks we had German finance minister’s down to earth comments that had to disappoint those who expected a breakthrough. Schaeuble said that the EU summit will not resolve the debt issues and investors read that as an indication of a disagreement in the European camp. Unless we see clear answers on a) when and by how much is the Greek debt reduced b) who is going to bear the cost c) when and how are banks recapitalized, we are going to stay in a camp of doubters when it comes to Europe.

Slower growth in China, disappointing NY Fed

While market are focused on Europe the data isn’t bullish either. The Chinese GDP grew 2,3% q/q and 9,1% y/y in the third quarter after 9,5% y/y in the second and against a consensus of 9,3% y/y. While it’s hard to call a 9% growth a slowdown, the growth is accompanied by relatively high inflation (6,1%) which means policymakers may not afford monetary or fiscal expansion at the moment. If China is going to slow further, industrial commodities may suffer significantly as in many cases China was a major contributor to a growth in demand over the last decade.

The NY Fed index – the first activity index for October – increased slightly from -8,82 to -8,48 but shy of market expectations of -4,1 pts. The reading should not be surprising – we expect the activity to stay weak for several next months. But after a decent September some investors started to hope that a recovery may actually come sooner and that outlook was prices on equity markets. From that perspective, a stagnant NY Fed index is naturally bearish. One should note that those disappointments came just after the S&P500 futures tested local highs from late August. That coincidence makes bears stronger and means that a reversal might be relatively steep. Unless we see a real turnaround in Europe we still assume the index to retest the ’11 lows over the medium term.

Przemysław Kwiecień PhD, Chief Economist

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