Summary: In this video I review the EUR and GBP as we start the week with very sharp declines in global equities and risk aversion themes including a move into German bonds and selling of Italian and Spanish debt, causing yields on the periphery to climb. I outline the top stories to start the week - including defeat of Merkel's party in regional elections and weak UK services data - and the impact on the EUR/USD and GBP/USD pairs. I also lay out the important risk events for this week including the ruling by German Federal Court on the constitutionality of current bailouts, a meeting of finance ministers to discuss Greek collateral issues and Thursday's ECB and BOE interest rate decisions.
Check of Risk Sentiment: Asian shares slide sharply:
- Follow through of weak August NFP (flat reading) report.
- Global growth prospects in doubt, traders dumping shares for safer assets like gold and bonds.
European shares tumble as well:
- Banks sold off after being named in suit by FHFA.
- Deutsche Bank, RBS, Societe Generale, Barclays, HSBC
- Low growth environment, political concerns to start week.
- Yields on Spain and Italy 10-year hit 1-month high.
US stocks closed for Labor Day.
Top Headlines from Europe Merkel's party suffers defeat in regional election.
- Social Democrats net 35.7%.
- Christian Democratic Union (Merkel's party) gets 23.1%
- Reflects voters unease about Euro, bailouts, eurobonds.
Troika left Greece with reports that Greece will miss its target for budget deficit by 1.2B euros, and alleged that Greece was slow to implement structural reforms, privatization plans and improvements to tax collection. European Risks This Week
- Rumors of downgrade threat to Italy.
- Thin liquidity, good time to spread some rumors.
- Saw this with France and Germany in recent weeks.
- Wednesday: German Federal Court ruling on claims that Berlin is breaking German law and European treaties by contributing to bailout of Greece, Ireland, and Portugal.
- Meeting of finance ministers from Germany, the Netherlands and Finland will be watched closely as they discuss the issue of collateral for loans to Greece.
- Thursday: ECB interest rate decision
In the UK:
- UK posts weaker-than-expected Services PMI.
- 51.1 (Aug) vs 55.4 (Jul), Forecast: 54.3
- Fall in headline business activity second steepest in survey history.
- Slowdown reflects weaker trend in new business and general economic uncertainty.
- Confidence hits 12-month low.
- The UK economy has also been struggling with a rash of poor data.
- The manufacturing sector contracted for second month in a row.
- We continue to see weak consumers limiting domestic demand.
- Export orders have fallen, which is increasingly worrisome because export growth is expected to lead UK economy as domestic spending is weak because of higher unemployment, higher inflation, and stagnant wage growth.
- Services PMI softer than expected.
- Fiscal consolidation here to stay.
To forestall slide into negative growth will BOE undertake another £50 billion pounds in quantitative easing?
Chief Market Analyst