Markets Overnight
Yesterday Italian PM Monti announced a EUR30bn package of austerity and growth measures. It contains EUR20bn of austerity measures as well as EUR10bn of proposals to spur growth. Monti’s cabinet in Rome passed the measures a day earlier than expected, and the full plan will be presented to the parliament today. With the early announcement Monti aims to reassure investors that he is serious about solving the Italian budget deficits and reigning in the huge debt. The plan is likely to be supportive for the Italian government bond market and gives ECB a strong incentive to continue to buy Italian government bonds.
The Asian markets have reacted positively to the austerity package from Italy this morning with modest gains; Nikkei is up 0.5% this morning. The Chinese indices on the other hand have reacted negatively to a report that shows a decline in PMI below 50.
The US equity market had its biggest weekly rally of 7.4% since March 2009 although the S&P500 was little changed in Friday’s trading session. Initially, the US equities rallied after a solid US labour market report, but concerns about the outcome of this week’s biggest event – the EU summit on 9 December – put a halt to this. The change in sentiment late Friday sent US bond yields down and the long end of the Treasury curve declined some 7bp.
In the FX markets EUR/USD has remained range bound at the 1.34-level. USD/JPY is at the 78-level in the Asian trading session this morning while we are waiting for the outcome of the EU summit. Movements in SEK and NOK versus the euro have been small with EUR/SEK trading at 9.04 and EUR/NOK trading at 7.75 this morning.
In Russia PM Putin is looking at a smaller majority after the Russian parliamentary elections on Saturday. Early results show that Putin’s party may only have gained around 50% of the vote down from 64% in 2007. The election results should not have much market impact.
Global Daily
Focus today:. The coming week will be very eventful. Today all eyes will be on the Merkel-Sarkozy summit in Paris, which is scheduled to start at 13:30. At the meeting Merkel and Sarkozy are expected to agree on a common vision for a stronger European Monetary Union including particularly a closer fiscal integration. Hence, we might get an idea of the outcome of the important EU summit later this week already today. In Italy Prime minister Monti will present his EUR30bn austerity package in parliament. There could also be focus on German Finance Minister Schäuble’s speech about a “strategy for competitiveness and growth” at 09:50 CET. In the data calendar the main focus today will be on retail sales for the euro area and non-manufacturing ISM in the US.
Fixed income markets: Yesterday's news that the Italian premier minister, Mario Monti, has agreed with his cabinet on a relatively ambitious austerity plan, will most likely be welcomed by the markets today. However, bigger events lie ahead and the market will focus on the outcome of today's Merkel-Sarkozy meeting. If this turns out constructively, the relief rally could continue ahead of the ECB meeting and the EU summit later this week, as expectations for a grand bargain build up further and short risk positions are squared out. That said, the market will remain very sensitive to the political news flow. While the EU summit or the ECB meeting have the potential to deliver, there is also an imminent risk that risk sentiment will deteriorate again if policy makers disappoint. We still see room for lower money market rates in Europe on the back of ECB cuts, but remain relatively neutral on duration and the curve.
FX markets: All eyes will be on the Merkel-Sarkozy summit. Merkel could very well be seen as more “constructive”, which could support the euro. We should take into account that the IMM data published Friday evening showed that the market currently holds the highest net speculative bet against the euro since May 2010. The market is short EUR/USD by 104,302 contracts up 21% from last week. Hence, the scope for short-covering in EUR/USD – and in risk in general – is in place today. Note also that the ECB, RBA, RNNZ and BoE are meeting this week. We are in for a very busy week in the global FX markets.
Yesterday Italian PM Monti announced a EUR30bn package of austerity and growth measures. It contains EUR20bn of austerity measures as well as EUR10bn of proposals to spur growth. Monti’s cabinet in Rome passed the measures a day earlier than expected, and the full plan will be presented to the parliament today. With the early announcement Monti aims to reassure investors that he is serious about solving the Italian budget deficits and reigning in the huge debt. The plan is likely to be supportive for the Italian government bond market and gives ECB a strong incentive to continue to buy Italian government bonds.
The Asian markets have reacted positively to the austerity package from Italy this morning with modest gains; Nikkei is up 0.5% this morning. The Chinese indices on the other hand have reacted negatively to a report that shows a decline in PMI below 50.
The US equity market had its biggest weekly rally of 7.4% since March 2009 although the S&P500 was little changed in Friday’s trading session. Initially, the US equities rallied after a solid US labour market report, but concerns about the outcome of this week’s biggest event – the EU summit on 9 December – put a halt to this. The change in sentiment late Friday sent US bond yields down and the long end of the Treasury curve declined some 7bp.
In the FX markets EUR/USD has remained range bound at the 1.34-level. USD/JPY is at the 78-level in the Asian trading session this morning while we are waiting for the outcome of the EU summit. Movements in SEK and NOK versus the euro have been small with EUR/SEK trading at 9.04 and EUR/NOK trading at 7.75 this morning.
In Russia PM Putin is looking at a smaller majority after the Russian parliamentary elections on Saturday. Early results show that Putin’s party may only have gained around 50% of the vote down from 64% in 2007. The election results should not have much market impact.
Global Daily
Focus today:. The coming week will be very eventful. Today all eyes will be on the Merkel-Sarkozy summit in Paris, which is scheduled to start at 13:30. At the meeting Merkel and Sarkozy are expected to agree on a common vision for a stronger European Monetary Union including particularly a closer fiscal integration. Hence, we might get an idea of the outcome of the important EU summit later this week already today. In Italy Prime minister Monti will present his EUR30bn austerity package in parliament. There could also be focus on German Finance Minister Schäuble’s speech about a “strategy for competitiveness and growth” at 09:50 CET. In the data calendar the main focus today will be on retail sales for the euro area and non-manufacturing ISM in the US.
Fixed income markets: Yesterday's news that the Italian premier minister, Mario Monti, has agreed with his cabinet on a relatively ambitious austerity plan, will most likely be welcomed by the markets today. However, bigger events lie ahead and the market will focus on the outcome of today's Merkel-Sarkozy meeting. If this turns out constructively, the relief rally could continue ahead of the ECB meeting and the EU summit later this week, as expectations for a grand bargain build up further and short risk positions are squared out. That said, the market will remain very sensitive to the political news flow. While the EU summit or the ECB meeting have the potential to deliver, there is also an imminent risk that risk sentiment will deteriorate again if policy makers disappoint. We still see room for lower money market rates in Europe on the back of ECB cuts, but remain relatively neutral on duration and the curve.
FX markets: All eyes will be on the Merkel-Sarkozy summit. Merkel could very well be seen as more “constructive”, which could support the euro. We should take into account that the IMM data published Friday evening showed that the market currently holds the highest net speculative bet against the euro since May 2010. The market is short EUR/USD by 104,302 contracts up 21% from last week. Hence, the scope for short-covering in EUR/USD – and in risk in general – is in place today. Note also that the ECB, RBA, RNNZ and BoE are meeting this week. We are in for a very busy week in the global FX markets.