Sentiment Weighed Down Further by Fiscal Cliff and ECB

 
on November 09 2012 5:11 AM

Market sentiment continued to be weighed down by concerns over fiscal cliff in the US, weakness in Eurozone data and ECB President Draghi’s lack of signal in further easing despite deteriorated economic outlook. Wall Street, fell with the DJIA and the S&P 500 index falling -0.94% and -1.22% respectively. Commodities, however, climbed higher, recovering from the sharp fall in the prior day. The front-month contract for WTI crude oil added +0.77% while the equivalent Brent crude contract gained +0.40%. Gold rose to a 3-week high of 1735.1 before settling at 1726.0, up +0.70%. Worried that sovereign debt crisis in the Eurozone might have worsened again have sent the yellow metal higher.

Now that the election dust is settled, what President Barack Obama would do in his second term to avoid the US fiscal cliff problem is of the focus. He is scheduled to speak on Friday about the issue. According to a statement from the White House, the President “reiterated his commitment to finding bipartisan solutions to: reduce our deficit in a balanced way, cut taxes for middle-class families and small businesses and create jobs". House Speaker John Boehner Boehner called for cooperation and stated that he’s confident that the Republican would accept new government revenues as part of a deal to reduce the federal debt.

As expected, the ECB left the main refinancing rate unchanged at the November meeting. While President Draghi signaled that the 17-nation bloc’s economic outlook has weakened, policymakers appeared to have no intention to add further easing measures to contain the deterioration. One reason we believe is the unchanged inflation outlook. Meanwhile, the central bank viewed current interest rates as appropriate and “accommodative” enough for the current situation, citing negative real rates as an evidence of this very easy stance. While the OMT is now operational, the President asserted that it would not be unconditional and the Spanish government would be get assurances about OMT ahead of its application. Concerning Greece, the ECB welcomed passage of the austerity measures by the parliament but stated that the central bank “is by and large done” on assistance given to Greece. The ECB also stated that the central bank “assures price stability and pursues the restoration of monetary-policy transmission channels but can’t do monetary financing”. This is expected to refer to the potential for T-bills financed by ELA and its legitimacy.

On the dataflow, Germany’s trade balance surplus fell from 18.1B (seasonally adjusted) euro to 17.0B euro in September. However, the surprising decline in exports on both monthly and yearly bases was worrisome. Indeed, the -3.4% y/y drop in export was the first negative reading since early 2010. Initial jobless claims fell -8K to 355K in the week ended November 3. However, the decline was probably due to the situation that some were not able to submit applications due to power outages and transportation disruptions. The 4-week average rose +3K to 371K last week while continuing claims fell -135K to 3127K in the week ended October 27. Today, the University of Michigan confidence index might have risen to 82.9 in November from 82.6 a month ago.

Oil and Gold Reports contributed by Oil N' Gold

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