Euro opens the week mildly lower as markets' focus are turning to the possibility of S&P downgrades, as early as today. S&P placed 15 eurozone nations on review last week and warned of possible downgrade, noting the significant of the EU summit. Even though a deal to tighten up fiscal rules was reached, but it's uncertain whether S&P is satisfied with the outcome. In addition, the rating agency might still be in deep worry on the underlying economic health of the region. The common currency is seen soft against most other major currencies but after all it's stuck in range without a clear direction. Italy is set to sell EUR 7b of one year bills today and France will sell EUR 6.5b of of short term debts. The results could possibly trigger some volatility in the markets.
The EU summit can be concluded in 4 points. First, a fiscal rule (embedded in constitutional rule) will be implemented and member countries are required to confine their structural deficits to 0.5% of GDP or below. An automatic correction mechanism was also introduced to handle the case of excessive deficit. Second, for countries having excessive deficits, they should submit a plan to the Commission and the Council an economic program explaining structural reforms to reduce the deficits to an acceptable level. New provisions will ensure that states running government debt in excess of 60% of GDP is reduced by 1/20th of the deviation each year. Third, the leveraged EFSF will be implemented as soon as possible and will remain active until mid-2013. The ESM will begin operation in July 2012. Member countries will evaluate the adequacy of the overall EFSF/ESM commitment of 500B euro in March 2012. Fourth, members are planning to lend 200B euro to the IMF which will then use the money to assist debt-ridden European economies. The decision of this issue will be made within 10 days.
In its quarterly report, the Bank of International Settlements noted that Fed's and BoE's quantitative easing program had "an immediate, non-negligible impact" on the markets they targeted, supporting the prices of bonds bought and other related asset classes. Fed's QE1 is noted as equivalent to cutting fed fund rates by 2.00%. The QE2 program lowered yields by average 21bps, maximum impact of 108 bps. BIS also expects Fed's operation twist to have a material effect of yields by bringing long term yields down 22bps and push up short term yields by 60bps. Nonetheless, BIS also noted that there are "limitations for further actions" considering the current low yields and less surprise impact to markets. Also, BIS warned the programs may "affect inflation expectations". Regarding BoE's program,according to BIS, the first asset purchase program lowered yields by 27bps, and maximum 74 bps. This was way lower than BoE's expectation of around 100bps reduction in yields.
Regarding impact of the Eurozone debt crisis, BIS noted that gross debt issuance in international markets dived to a six year low of $1.66T in Q3. More than 25b was withdrawn from emerging market funds in August. BIS noted that “financial institutions with direct exposure to euro-area sovereigns saw their costs and access to funding deteriorate.” Meanwhile, "a run of poor data and policy uncertainty put pressure on bonds issued by euro-area sovereigns with high debt burdens". Surge in Greek and Portuguese yields reflected "difficulties in meeting fiscal targets with their economies mired in recession."
On the data front, Japan domestic CGPI rose 0.1% mom, 1.7% yoy in November. Household confidence dropped slightly to 38.1 while machine tools orders rose 15.9% in November. Australian home loans rose 0.7% in October, trade surplus narrowed sharply to AUD 1.6b in October.
The EU summit can be concluded in 4 points. First, a fiscal rule (embedded in constitutional rule) will be implemented and member countries are required to confine their structural deficits to 0.5% of GDP or below. An automatic correction mechanism was also introduced to handle the case of excessive deficit. Second, for countries having excessive deficits, they should submit a plan to the Commission and the Council an economic program explaining structural reforms to reduce the deficits to an acceptable level. New provisions will ensure that states running government debt in excess of 60% of GDP is reduced by 1/20th of the deviation each year. Third, the leveraged EFSF will be implemented as soon as possible and will remain active until mid-2013. The ESM will begin operation in July 2012. Member countries will evaluate the adequacy of the overall EFSF/ESM commitment of 500B euro in March 2012. Fourth, members are planning to lend 200B euro to the IMF which will then use the money to assist debt-ridden European economies. The decision of this issue will be made within 10 days.
In its quarterly report, the Bank of International Settlements noted that Fed's and BoE's quantitative easing program had "an immediate, non-negligible impact" on the markets they targeted, supporting the prices of bonds bought and other related asset classes. Fed's QE1 is noted as equivalent to cutting fed fund rates by 2.00%. The QE2 program lowered yields by average 21bps, maximum impact of 108 bps. BIS also expects Fed's operation twist to have a material effect of yields by bringing long term yields down 22bps and push up short term yields by 60bps. Nonetheless, BIS also noted that there are "limitations for further actions" considering the current low yields and less surprise impact to markets. Also, BIS warned the programs may "affect inflation expectations". Regarding BoE's program,according to BIS, the first asset purchase program lowered yields by 27bps, and maximum 74 bps. This was way lower than BoE's expectation of around 100bps reduction in yields.
Regarding impact of the Eurozone debt crisis, BIS noted that gross debt issuance in international markets dived to a six year low of $1.66T in Q3. More than 25b was withdrawn from emerging market funds in August. BIS noted that “financial institutions with direct exposure to euro-area sovereigns saw their costs and access to funding deteriorate.” Meanwhile, "a run of poor data and policy uncertainty put pressure on bonds issued by euro-area sovereigns with high debt burdens". Surge in Greek and Portuguese yields reflected "difficulties in meeting fiscal targets with their economies mired in recession."
On the data front, Japan domestic CGPI rose 0.1% mom, 1.7% yoy in November. Household confidence dropped slightly to 38.1 while machine tools orders rose 15.9% in November. Australian home loans rose 0.7% in October, trade surplus narrowed sharply to AUD 1.6b in October.