In today's Asian session, risky assets again came under selling pressure as the weekend's events failed to provide markets with any additional security. Friday saw a sharp USD appreciation as positive data continues to come out of the US, in contrast with the negativity coming from Europe. Hungary clumsily stepped into the sovereign default fray last week which helped precipitate a selloff in EURCHF just as the market's high expectations for US NFP failed to live up to the hype. Officials from the new Hungarian government spent the weekend trying to repair damage from the reckless comments released last week regarding Hungary's state finances. The state secretary attempted to reassure the markets that there was huge differences between them and Greece. We suspect the market's reaction was overdone as Hungary clearly possesses the tools and freedom to execute independent monetary policy, a luxury that Greece does not enjoy.
Judging from the losses seen in Asia so far, risk aversion over sovereign debt is back and will likely remain the core driver this week. The recent G20 finance minister meeting failed to provide any guidance to markets and investors once again. However, in a move that was slightly risk positive - the ministers decided to stop a proposal for a worldwide levy on banks, opting to leave these types of measures to individual governments. Most likely, the idea was scrapped because it would have been difficult if not impossible to implement and enforce on a global scale.
Both the BoE and the ECB will be putting out announcements this week. At the BoE MPC meeting, we expect that the Committee will rule to leave the current policy unchanged with the bank rate at 0.5% and a QE asset purchasing target of £200 bn. For the ECB decision, it's universally assumed that the ECB governing Council will hold rates steady and that their focus will be on the government bond purchasing program and money market operations for Q3. For more information about both the BoE and ECB meetings, please see our Central Bank Preview.
On a final note, the weekend papers brought many headlines, but I'd like to address 2 pieces in particular. The UK Sunday Telegraph posted the splashy headline of Euro will be Dead in 5 Years signaling that now the whole world believes that the European Monetary Union is unstable and won't last, an obviously exaggerated title we believe (given current evidence however, things remain dynamic). Further in the German weekly periodical Der Spiegel, inside sources were cited advancing the notion that the German Constitutional Court is considering the possibility of ordering an interim ruling against Germany's involvement in the €750bn EU/IMF rescue package. With all the fear-inducing Euro headlines, it is important to remember that the Eurozone, fundamentally and not organizationally, still retains solid economic foundations. It was said that JP Morgan knew when to sell because his shoe-shine boy would start giving him stock tips. When coming across sensationalism of this sort, remember that papers are in the business of providing a generalized service, and that perhaps we too, as Mr. Morgan would, should take the unspoken cue from the telegraph.