Key news
- Following the Eurogroup meeting it was announced that Greece will have to sign a pledge before EU/IMF money will be released and that the work with leveraging the EFSF will be ended in November.
- In Greece speculation continues on how the unity government should be formed.
- Italian bond yields rose to new euro era highs.
- Main focus today is the political situation in Greece, a budget vote in Italy, ECOFINmeeting, UK industrial production and German trade figures.
Markets Overnight
The main outcome of last night’s Eurogroup meeting was that the Finance Ministers once again reiterated that two options remain to leverage the EFSF: credit enhancement and a co-investment fund (new names for the first loss insurance model and the SPV). The work with leveraging the EFSF is set to be ended in November and implementation will start in December. The Finance Ministers also asked for a signed pledge from both main political forces in Greece to ensure that whoever wins the election will stay on the austerity course. No EU/IMF money will be released before this.
Overnight speculation on who should lead the Greek interim unity government continued. The former ECB Vice President, Lucas Papademos, remains the main candidate, but other names have been mentioned. However, a problem seems to be that the New Democracy party only wants to “contribute” with a couple of key figures as it wants to keep its candidates “fresh” for the election in 2012.
In Italy, rumours of PM Berlusconi stepping down influenced yesterday’s trade. Italian 10-year government bond yields reached new euro era highs. A vote on the 2010 budget today will be followed closely as it can give an indication of whether Berlusconi still holds a majority in parliament. Following the Eurogroup meeting it was announced that EU officials are set to visit Italy this week to monitor its progress, and that an IMF delegation will follow in the coming week.
The negative sentiment from the European trade session carried over to the US, which traded in negative territory until just before closing. The sentiment in the US market was turned around by remarks from ECB’s Juergen Stark who said that “he expects the euro-area debt crisis to be under control within two years”. The S&P 500 ended the session up by 0.6%. The Asian stock markets are trading with no clear direction. Nikkei is down 1.3%, while Hang Seng is up 0.3% this morning. US bond yields increased slightly overnight as risk appetite increased and 10-year yields ended the session in 2.03%. In the FX market EUR/USD has been range trading just around 1.375. EUR/CHF has continued the increasing pattern and is this morning trading above 1.24.
Global Daily
Focus today: News out of Greece and Italy continues to be the main driver and the ECOFIN meeting might attract attention as well. There are no US data out today and in the euro area German trade balance for September due early this morning is the only release of interest. It is likely to show a drop in exports as global demand probably dampened in September. In UK industrial production is released this morning as well. Later today SNB's Jordan speaks and tonight Fed hawks Kocherlakota and Plosser are due to speak.
Fixed income markets: Italy remains in the limelight after the 10-year spread against Germany yesterday widened above 485bp. It appears that the ECB is still not very active regarding purchases as it wants more commitment to reform. So the central bank’s actions still appear very much politicized. Today is the last day of the October reserve maintenance period, so 1W (EUR183bn maturing) and 1M tenders (EUR59bn maturing) will be announced just before noon. Furthermore, there will be government bond auctions in the Netherlands and Austria in the 10-year segment. This will be the last auction in the Netherlands and the second last in Austria.
In the FX markets attention continues to be on Italy and risk is in our view tilted to the downside for EUR/USD. We also keep a close eye on EUR/CHF. This Sunday central bank President Hildebrand warned that new measures to weaken the franc would be a possibility if the threat of deflation returned. Hence, with inflation falling 0.1% y/y in October the market is increasingly seeing risk to the upside for EUR/CHF (higher minimum target) and the cross is currently trading at 1.243, well above the minimum target at 1.20.
Scandi Daily
In Norway Norges Bank vice Governor Qvigstad will give a speech on "managing wealth". We doubt it will contain any news, but given the ECB rate cut last week look out for any comments on how this might affect Norwegian monetary policy.