Berlusconi Falls In Line And Euro Rallies On LTRO Hopes

Published 10/03/2013, 05:31 AM
Updated 07/09/2023, 06:31 AM
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Yesterday’s ECB meeting was defused somewhat by the fizzling out of near-term political risk in Italy, but still held some interesting news. Obviously there was no change in policy from the European Central Bank, but Draghi was very keen to emphasise that the ECB could still help the Eurozone economy via another Long Term Refinancing Operation – funding to Eurozone banks. This boosted the euro through 9 month highs versus the USD and took GBPEUR away from the 1.20 level it has been flirting with in recent days.

This is despite a very well telegraphed attempt by Draghi to talk down the Eurozone economy by saying that economic growth is weak, prospects are poor and that credit issues remain. This is nothing new, and in fact, a lot of Draghi’s comments were almost a facsimile from last month’s meeting. Nothing has changed, the Eurozone is still in a hole. ECB members did discuss a rate cut this month, but once again plumped for no change. Unfortunately there is very little else the ECB can do in the short-term, apart from cut rates.

The saying goes that ‘politics is a show business for ugly people’. If that is true then Italian politics is a truly award-winning ugly soap opera. Silvio Berlusconi, a man of 77, executed a perfect backflip on the floor of the Italian Senate. Speaking yesterday morning, the man who threatened to bring down the government of Enrico Letta, instead said that he will vote for the PM in the confidence vote and that the PDL party that he commands would do likewise. Letta passed the vote with little trouble in the end, but this does not rule out further political strife in Italy.

Berlusconi has not ‘gone away’ and will continue to snipe at this government from the side-lines much like Beppe Grillo has done since the election in February. In the meantime, the euro has rallied back from its recent lows and Italian debt yields are also falling. ‘Tutto bene’ as my Italian friend Fabrizio would say. That is of course until this Friday when the country’s Supreme Court is due to vote on expelling the former Premier.

In Washington the shutdown continues apace, however, with Obama weighing in once again overnight. The President reiterated his desire to negotiate with Republicans on the budget as long as the debt ceiling is also allowed to be raised. It is looking more and more likely that the shutdown will last until October 17th; the deadline for the debt ceiling. Needless to say, the longer this lasts the more damage will be caused to US economic output in Q4.

Yesterday’s UK economic news was once again slightly disappointing; the latest run of data that may just temper thoughts on the UK recovery. This time it was construction PMI, but despite this measure missing out a 7th consecutive month of improvement, the UK construction sector remains in fine fettle.

Employment remains strong with job creation growing at the fastest rate since 2007 and the optimism around the sector as a whole has not been this strong since April 2010. Many will look to see if recent headlines around a housing bubble have caused a proportionally larger rise in residential building, and although this was at the strongest level since November 2003, commercial contracts also rose strongly on the month. We can now be sure that the construction sector will have made a meaningful contribution to GDP in Q3, something that was far from reliable earlier in the year.

In the absence of this month’s payrolls announcement courtesy of the shutdown in the US, the market seized on yesterday’s ADP release. Unfortunately the US jobs market has once again missed estimates and only managed to produce 166,000 jobs in September compared to the 180,000 the market had expected, and August’s number was also revised lower. Dollar has weakened on the announcement as we wait for signs the US jobs market is strong enough to withstand a reduction in monetary stimulus.

Services data from around the world is due today in the form of services PMIs and ISMs. We also receive Eurozone retail sales at 10am and US initial jobless claims at 13.30.
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