The global conversation has clearly shifted across the pond to the US deficit debate with the current news flow being far from helpful regarding risk appetite. Headlines suggest that the US bi partisan “super committee” will fail to agree on the targeted $1.2trn spending cuts. With markets expecting a forthcoming statement from co-committee chairs, risk appetite was lower across the board, with Asian regional indices down and European stock futures threatening to follow. The Nikkei slipped -0.32% while the Hang Seng fell -1.19%. In FX, AUD and GBP were the under pressure as AUDUSD fell to 0.9943 from 1.0020 and GBPUSD fell to 1.5734 from 1.5810. However, there is a low probability event that a strong reaction in US equity markets might actually pressure republicans and democrats to put politics aside and get the deal done before the 23rd deadline. Going into an election year, neither side will be willing to risk, being labeled as the party, that killed US AAA credit rating. The “super committee” was the first test of Washington’s ability to take creditable actions to stabilize the US deteriorating fiscal condition. Accordingly in this weekend’s media reports, the debate is winding down with parties in deadlock and very far apart. Should the committee fail to agree on the $1.2trn spending cuts, sequestration or automatics broad based cuts will kick in. Should sequestration kick in, the possibility of credit downgrade in 2012 will be increasing significant, since this inaction will highlight rating agencies biggest fears, that the US politics system is broken and incapability of making the critical fiscal measures.
While the US will provide a temporary distraction, we are not seeing much market reaction pointed directly at US assets or USD, therefore we suspect that price action will be determined by events in Europe. On that front, we have had very little action. As was widely expected, Spain’s center right party won with an absolutely majority (186 of the 350 seats in parliament). While the continuation in structural reforms and further fiscal consolidation will be welcomed by investors, unfortunately this election alone will not be enough to reverse the Spanish sovereign yields trajectory. On the ECB as the lender of last resort, there has been no real change in the central banks resistance. The ECB remains unwilling to commit to wide spread and large scale bond buying in the secondary markets. As evidence that contagion is spreading and deeper erosion in the Euro zone economies suggested downside risk in growth, other solutions (structural reforms and /or austerity measures) will take longer to activate.
While the US will provide a temporary distraction, we are not seeing much market reaction pointed directly at US assets or USD, therefore we suspect that price action will be determined by events in Europe. On that front, we have had very little action. As was widely expected, Spain’s center right party won with an absolutely majority (186 of the 350 seats in parliament). While the continuation in structural reforms and further fiscal consolidation will be welcomed by investors, unfortunately this election alone will not be enough to reverse the Spanish sovereign yields trajectory. On the ECB as the lender of last resort, there has been no real change in the central banks resistance. The ECB remains unwilling to commit to wide spread and large scale bond buying in the secondary markets. As evidence that contagion is spreading and deeper erosion in the Euro zone economies suggested downside risk in growth, other solutions (structural reforms and /or austerity measures) will take longer to activate.
Regards
M.Zohaib Gadit
Forex Trading Consultant
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