Consolidations Continue As Investors Remain Cautious On ESM Ruling

The FX markets continue to consolidate in tight range so far today. Asian equities are broadly lower following late selling in Dow and S&P 500 but selling pressure is so far mild. The euro stays firmly in tight range against dollar and yen and markets look beyond today at German Constitutional Court's ruling on the EUR 500b permanent bailout fund ESM tomorrow.

The ruling is on a preliminary injunction, requested by a group of conservative German politicians, that could prevent the parliament from ratifying the treaty governing the ESM. The ruling is particularly important at this timing as troubled eurozone countries are expected to tap into ESM for qualifying into ECB's Outright Monetary Transactions bond buying program.

Markets are so far optimistic based on the fact that the court has granted the parliament powers on EFSF last year. Nonetheless, there are chances that the court could impose a veto power over ESM by Germany. And any strings attached to ESM would be seen as mildly negative.

In Greece, Prime Minister Antonis Samaras said that he failed to secure agreement from his coalition partners on 11.5B euro of fiscal reduction required by the EU/ IMF/ECB. The condition is for securing the next tranche of financial assistance from the Troika. Finance Minister Yannis Stournaras said that the meeting with the troika "is a difficult discussion" although the government has been "trying to convince them on the soundness of our positions." Talks regarding bailout conditions raised concerns about the situation in Spain.

Prime Minister Mariano Rajoy stated that he believes that bailout conditions would be reasonable and he would request for funding if he deems suitable for the country. Yet, Rajoy said that he "could not accept that they tell us which are the concrete policies in which we have to cut or not cut." For instance, Rajoy stated that pensions are the area cannot be reduced because "the pensioner is the most fragile person."

Another main focus of the week is FOMC meeting on Thursday. Markets would possibly remain cautious ahead of that too. We'd still believe that the current situation doesn't warrant immediate additional easing. In particular considering the ECB's OMT announce had already given financial markets a very strong boost last week. Nonetheless, markets have some hope that Fed will give more hints on when and what kind of additional easing would be implemented. Also, Fed would release new economic projections and might push the low rate pledge into 2015.

On the data front, UK RICS house price balance improved to -19 in August. Australia NAB business confidence deteriorated to -2 in August. Japan machine tools orders dropped -2.6% yoy in August. UK, Canada and US will release trade balance today while Canada will also release housing starts.