Europe: tenders, meetings and IMF’s (denied) bazooka

Equity markets tumbled, euro declined and emerging currencies were sold-off last week as European politicians seemed clueless on how to response the “European” phase of the crisis. The Eurobonds idea fell (at least for now), money printing still seems to be a song of the future and Germany faced a lot of opposition against an amendment of the treaty. Meanwhile, Belgian 10Y yields soared above 5,80% (higher than Italian at the beginning of October), even before S&P cut Belgian rating to AA and despite an agreement on the budget in Belgian parliament (Belgium has no government for nearly two years!). 

European politicians will be back facing the wall this week as three troubled sovereign will try to sell bonds: Belgium today, Italy tomorrow and Spain on Thursday. After a failed auction in Germany last week, markets may be really nervous about those three tenders. We got used to that “two steps back, one step forward” approach that has been applied for nearly two years and since we are just two steps back and politicians face the wall and we have the Ecofin meeting there might be time for a step forward.

There were rumors on the market that the IMF prepares a bazooka loan for Italy of 600 bln EUR as the new government is set to introduce a new range of measures. That would be an ideal story behind a “step forward”, however, it was quickly denied by the IMF. Therefore, politicians will need to work on something else but we really doubt a real turnaround may happen soon as Western societies are still unprepared for serious structural reforms.

EURUSD remains in the downward wedge and the “target” of 1,3145 – a minimum from early October is within a reach. Is that a good opportunity for a corrective rebound? Yes if we see this “step forward” in Europe. Technically, one wants to see the market moving above the upper limit of the wedge before buying into a correction.

US: the key data ahead

The US data has been overshadowed by Europe as of late and there is a logic in it – developments on the old continent may be a “make or break” for the global recovery. However, it is still worthwhile to observe how the US economy is responding to that shock. It has responded fairly well thus far but this week brings about a new set of info. The market will be focused on the labor market data (ADP on Wednesday, payrolls on Friday) but we think there might be no radical change in those figures, while “soft” indicators might have a more interesting story to tell.

We are especially curious about the Conference Board index (released tomorrow) that hit 2,5y low in October. We wrote after that reading that the comparison with the S&P500 looked dangerously similar to what we saw back in 2008 (before the Lehman collapse - stocks recovered after the Bear Stearns takeover despite deteriorating moods on the main street). Equities retreated since then but the gap still remains and it will be interesting to see if the sentiment index rises to close it (at least partially). The ISM (Thursday) has remained above 50 pts. thus far and regional indicators in November suggested it shouldn’t change. A decline below that mark would be a clearly negative news.

Przemysław Kwiecień PhD, Chief Economist

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