- Positive sentiment in Asian stock markets ahead of key economic data from China this week.
- EUR has strengthened and JPY weakened as central bank policies diverge.
- Bernanke might give more colour on Fed's exit strategy tonight.
According to FT this morning, an EU draft on the direct recapitalisation of failing banks by the ESM, agreed in June, suggest that sovereigns will still have to bear much of the cost themselves. Countries such as Ireland and Spain had hoped that the agreement could be a game changer that would shift the cost of bank bailouts from their sovereign books to the ESM. Elsewhere, Greece approved a new round of tax increases on Saturday in order to receive the upcoming aid payment of EUR14.8bn from the IMF and the EU in March.
In the US politicians are positioning for the coming debate over the debt ceiling. Latest, leading Democrats have said that they support President Obama taking "all legal steps" to avoid a US government debt default in the case that Republicans are not willing to support an increase of the debt ceiling. Under the current legislation, the President is allowed to mint platinum coins of whatever denomination he wants.
The idea of using this as a measure to fund the government was first introduced as a joke by several bloggers but is now being used for bargaining purposes by Democrats. However, the Treasury department, the Fed and the White House have rejected using the platinum coin to fund the government.
Friday was a quiet day in the US stock markets and the S&P 500 index ended up 0.4% over the week. This morning the sentiment in Asian stock markets is positive with Chinese shares taking the lead ahead of a row of economic data releases this week.
In European bond markets, periphery spreads continued to tighten Friday against Germany and the 5-year Spanish government bond auction was very well received. In the US Treasury market, 10-year yields moved slightly lower while 2-year yields were broadly unchanged leaving yields 2 to 6bp lower over the week as markets scaled back their expectations of an early Fed exit from QE.
In FX markets, JPY has continued to weaken as Prime Minister Abe is continuously putting pressure on Bank of Japan to ease monetary policy. EUR continued to strengthen on Friday both against USD and the Scandi currencies after the ECB meeting on Thursday closed the door for further rate cuts.
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