- Greek plan for debt reduction lifted sentiment in Europe yesterday, despite several unresolved challenges.
- US equities were dragged down by concerns over the looming US fiscal cliff.
- US Treasurys saw sustained demand and were also supported by a strong auction.
- In the FX market JPY gained the upper hand while SEK suffered. Markets Overnight
Despite unresolved challenges, Greek plan buys time, lifts sentiment in Europe. In terms of debt-reduction, the plan seems to fall slightly short of the 124% target to be achieved by 2020 and the lack of details on the debt buyback programme adds further uncertainty. Secondly, the plan relies on a positive economic outlook, whereby Greece would return to growth within two years.
Nonetheless, the deal buys time, opening up for EUR43.7bn of disbursements and German Finance Minister Schäuble acknowledged on Tuesday that further measures could be taken once Greece achieves primary surplus. Importantly, according to EU officials, this is unlikely to be achieved before 2014, thus effectively pushing further debt relief to after the German elections.
Fiscal cliff concerns set the direction for US stocks, defying stronger economic data. The US bourses opened lower and concerns over gridlocked budget negotiations set the tone for the day. There were some signs of compromise, with a few Republicans publicly disavowing a no-new-taxes pledge, while Democrats signalled some willingness to reform Medicare and Medicaid (see Reuters for an update).
However, late in the session, comments from Senate Democratic Leader Reid that there had been "little progress" in dealing with the fiscal cliff and that discussions needed to move away from "happy talk" to "specific things" weighed on sentiment and the S&P500 index closed 0.5% lower. Before Reid’s comments, a slate of strong US economic data had offset worries.
First, durable goods orders held steady, defying expectations of a 0.7% decline in October. Then data showed house prices rising for a sixth consecutive month, with the S&P/Case-Shiller index rising a seasonally adjusted 0.3 percent in September. Finally, data showed consumer confidence rising to the highest level in more than four years, despite the lingering fiscal cliff concerns.
US Treasurys gained support from weak sentiment and strong auction. Fiscal cliff concerns seemed the dominant factor driving market action, though strong demand at yesterday’s two-year auction also supported the front-end. The USD 35bn issue was awarded at 0.27%.
In the FX market, JPY gained the upper hand, sending USD/JPY below the 82 handle. However, relatively to the remaining G10 currency universe, the greenback also received support and EUR/USD has fallen towards 1.29. Overall, SEK has been the worst-performing currency since yesterday, which is partly due to weaker risk sentiment and partly due to yesterday’s weak Swedish economic data (e.g. consumer confidence).
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