Markets Stay In Consolidation With Focus On Spain Budget

Markets continue to stay in consolidative price actions. While we're seeing downside bias in risk markets and upside bias in dollar and yen, there was no strong sustainable momentum so far. The sell-off in US equities in the past two days triggered some worries but that wasn't followed by Asian equities today. At the time of writing, Nikkei is up 43 pts while HK HSI is up over 250 pts on prospect of Chinese stimulus as it's reported that China could inject as much as CNY 180b into the money markets.

EUR/USD and EUR/JPY continue to hold on to 1.2816 and 99.52 support level. AUD/USD also staged a recovery and is back above 1.04 after dipping to 1.0328 earlier this week. Spanish 10-year yield does stay above 6% for the moment but that could just be markets testing Spain's nerve as the country is still hesitating to seek a sovereign bailout. Main focus will remain on Eurozone in near term, but we still don't expect the pull back in Euro to be much deeper.

Spain is set to unveil the first draft of 2013 budget today. That could involve setting up of a new agency to monitor the progress of the fiscal adjustment program. And it's reported that there would be a EUR 39b worth of austerity, including savings, tax hikes and structural reforms. Spanish prime minister Rajoy said yesterday that if borrowing costs were "too high for too long," he can assure "100% that I would ask for this bailout."

But before that, Spain would like to make use of the new austerity program to convince ECB that no tougher measures are needed even in case of a bailout. On the negative side, Bank of Spain has warned that Q3 output fell at a "significant pace" and there are chances that Rajoy could project a deficit of 7% of GDP or higher, due to recession, and miss its target of 6.3%.

Another focus of the day will be on Italy's auction of up to EUR 7b of debt. That include up to EUR 1b of 2017 CCTeu, EUR 3b of 2017 BTPs, EUR 3b of 2022 BTPs. Italian 10 year yield followed Spain higher and is at 5.23% for the moment, after dipping below 5% level last week. Italian prime minister Monti said earlier this week that the risk of losing sovereignty is over and he has no intention to ask external aid. Monti also pledged to "further strengthen fiscal sustainability and enhance potential growth," and won't overlook importance of EU level measures to "strengthen governance and fiscal integration" and deliver them on national level.

In US, Chicago Fed Evans warned that Fed "cannot be complacent and assume that the economy is not being damaged if no action is taken." And he said that "modest, cautious, safe policy actions" will risk Japan style lost decade. Evans said sustainable job growth at 200k to 250k per month for "several, several months" is needed before revisiting the highly accommodative monetary policy. Evans said that inflation risks are so far "well-managed" and unemployment will only decline slowly to 7% level at the end of 2014.

On the data front, New Zealand NBNZ business confidence dropped to 17 in September. German import price rose 1.3% mom in August. Eurozone M3, confidence indicators and UK GDP Q2 final will be released in European session. From US, Q2 GDP final, durable goods orders, jobless claims and pending home sales will be featured.