Sentiment Dampened on Renewed Debt Concerns

 
on September 06 2011 1:28 AM

As the US was on holiday, the market focus was on Europe where renewed concerns over sovereign crisis in the European periphery damped sentiment. Peripheral yield spreads rallied and European bourses slumped as led by the banking sector as the defeat of Merkel may increase the difficulty of pushing the new EFSF. Meanwhile, the ECB and the IMF were in disagreement regarding the capital requirements of European banks. This intensified worries that it would take even longer for the issue to be resolved. Fears and uncertainties increased demand for safe-haven with gold jumping above 1900 again today, the first time since August 23, while the USD also advanced against major currencies. Oil continued to follow equities' track with the Brent crude contract losing -2.00% before recovering today.

German Chancellor Angela Merkel's CDU suffers the 6th defeat in regional elections in weekend. Polls showed that supports on the CDU fell to 23.1%, the worst since 1990, while the Social Democrats' supports were at 36.1%. Analysts said CDU's failure was due to its support to bailout Greece. Yet, Merkel denied. Not matter that the reason is, the defeat indicates it's getting more difficult for the party to push for the EFSF. Last week, Merkel's cabinet backed the new EFSF which is given purchasing power on sovereign bonds. Germany's share in the loan guarantees is raised to 211B euro from 123B euro. Members of the GCD party are confident that they can secure a coalition majority to get approval on September 29.

Separately, in a draft of the Global Financial Stability Report, the IMF unveiled that the funding needs for European banks would be as much as 200B euro. ECB President Trichet said 'there is a very important disagreement on the methods for calculating the capital needs' and he is 'convinced that the final IMF figure will not be that[probably much lower]'. At the same time, Trichet urged debt-ridden countries such as Greece and Italy to strictly implement austerity measures as planned.

There was not much to do with the dataflow with the US on Labor Day holiday. In the Eurozone, the services PMI remained unrevised at 51.5 in August. The Sentix investor confidence slipped to -15.4 in August from -13.5 in the prior month. The market had anticipated a sharper drop to -18. Retail sales climbed +0.2% m/m in July, compared with a flat consensus reading and a downwardly revised +0.7% in June.

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