- EU and IMF disagree on Greek debt reduction - rescue plan postponed.
- CBO warns US policy makers about fiscal cliff.
- Sell-off continues despite stronger-than-expected US data.
Concerns about the European debt crisis may rise again as a solution to the Greek debt problems may be postponed. According to an article in Financial Times, officials involved in negotiations say that the IMF and the European commission disagree on how much debt relief for Greece is needed and who will have to bear the losses from lower debt repayments. It was initially expected that a new programme for Greece, which extends the rescue plan to 2016, could be finalised in connection with the EU Finance Ministers meeting in Brussels on Monday.
However, it now looks increasingly likely that a deal will not be made until late November and that the next tranche of EUR5bn aid to Greece, which is due next Friday, will not be paid. Hence, market pressure on peripheral countries could intensify and European politicians’ willingness to compromise could be tested again.
Chinese data released overnight were better than expected across the board. Industrial production in October accelerated to 9.6% y/y from 9.2% y/y in September. Growth in fixed investment and retail sales was also stronger than expected. These data suggest that GDP growth is picking up and there might even be some upside to our 8% q/q AR GDP forecast for Q4. CPI in October unexpectedly declined from 1.9% y/y to 1.7%, mainly on the back of lower food price inflation.
Renewed focus on Europe and less focus on US politics could be quite helpful for the re-elected President Obama, who still has to figure out a way to settle a deal with the Republicans on the American fiscal challenges. However, the fiscal cliff remains the primary source of concern in the market and, according to an article on Wall Street Journal, the CBO last night released a new report that warns that if policy makers do not act before the end of the year, the economy would contract by 0.5% in 2013 and the unemployment rate would jump from 7.9% to 9.1% by the end of 2013.
US equities dropped for a second day on fiscal cliff concerns despite better-than-expected data from the US that showed a marked improvement in the trade balance with a solid gain in exports of 3.1% in September. However, S&P500 closed 1% lower while Dow Jones lost 1.2% and the negative sentiment continued in the Asian trading session where most regional indices currently trade with losses.
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