Europe: Lowered Global Growth, The ESM

Risk markets recovered mildly in Tuesday's Asian session and triggered some retreat from the dollar and yen. Hope of additional stimulus from China was the main driver in stocks. A newspaper -- Economic Information Daily -- said China is planning to invest RMB 2.3T in railroad infrastructure through 2015. But upside is capped so far on worries on global growth as the IMF lowered world GDP projections. In the currency markets, the current development still suggests that most pairs are in consolidation and favor another round of recovery from the dollar and yen before their respective down trend finally resumes.

Lowered Global Expectations
The IMF lowered estimates of global GDP to 3.3% for this year and 3.6% for 2013. That compares to its prior projection of 3.5% in 2012 and 3.9% in 2013, made in July. IMF also stated there's a one-in-six chance of growth to fall below 2%. Chance of recession in 2013 is high as the IMF said the U.S. would have a 15% chance, the Euro zone an 80% chance and Japan 25%. IMF said that global recovery "has suffered new setbacks, and uncertainty weighs heavily on the outlook", adding, "downside risks have increased and are considerable." And, "the answer depends on whether European and U.S. policy makers can deal proactively with their major short-term economic challenges." Growth projections for China were also lowered to 7.8% in 2012 and 8.2% in 2013.

In another report, the IMF stated in its Fiscal Monitor report that fiscal shortfalls in advanced economies would fall to an average of 5.9% of GDP in 2012 and 4.9% in 2013, from 6.6% last year. While the figures were revised modestly higher from July's estimates of 5.8% and 4.7% respectively, the trend of narrowing deficits is positive news for the market. According to the world lender, "most countries have made significant headway in rolling back fiscal deficits and the improvement in fiscal balances is most pronounced in advanced economies, where the fiscal shock was larger, followed by emerging market economies and to a lesser extent by low-income countries."

The ESM...Finally
In Europe, yesterday marked the debut of the ESM, which has a lending capacity of about 500B euro. Eurogroup President Jean Claude Juncker stated that "The start of the ESM marks a historic milestone in shaping the future of the European monetary union. The euro area now is equipped with a permanent and effective firewall, which of course is a crucial component in our strategy to ensure financial stability in the Euro zone."

Yet, investors were still not comforted by the additional firewall as evidenced by the decline in the euro and rises in peripheral yields. Indeed, the market remained concerned about Spain as the debt-ridden country continued to refuse requesting external funding. Regarding this, Juncker said he is "satisfied with the fiscal consolidation measures taken so far by the Spanish government. It is not up to me nor to us as members of the Eurogroup to advise the Spanish government to make a request." German Finance Minister Wolfgang Schaeuble also said that "the Spanish don't need an assistance program. That is what the government says over and over again and we should just trust the Spanish government." While it still has yet to apply for a bailout, the Spanish government announced that it would seek a EUR 4.86b private placement of three-to-five-year bonds for financing needs.

Data
On the data front, Australian NAB business confidence improved to zero in September. UK BRC sales monitor rose 1.5% yoy in September while RICS house price balance improved to -15. UK data will be the main feature today with industrial and manufacturing production, visual trade balance and NIESR GDP estimate. Canada will release housing starts.