Monday, August 1, 2011

The Week Ahead - 1 August 2011


With markets already deeply worried about the outlook for sovereign debt on both sides of the Atlantic, they also have to contend with the ISM and labour reports in the US and central bank meetings in the Eurozone, UK, Japan and Australia. We still have hopes that US politicians will eventually come to some form of agreement that will prevent a default, but the loss of the AAA rating is looking probable if a long-term austerity package is not approved. The deadline the politicians are working to is August 2nd for the debt ceiling to be breached. However, in reality there is likely to be a buffer that will take us into the following week given stronger-than-anticipated tax revenues.

Another busy week of news and numbers as various markets flirt with key chart levels. Eurozone sovereign debt woes continue, finance ministers Schaeuble and France’s Baroin writing in the FT that, ‘the Eurozone summit…prevented [note past tense] Greece’s sovereign debt crisis from becoming a crisis that could damage the Eurozone as a whole, and the EUR as a consequence’. Benchmark 10-year government bond yields in Belgium, Italy and Spain hit new records over Bunds at 183, 338 and 358 bps respectively (when the Bund yields just 2.55%). Early elections were called by Spain’s leftist government and Moody’s puts its Aa1 rating on watch negative.

Cyprus was downgraded to Baa1 by Moody’s on a power plant explosion and Greek debt holdings; President Christofias dismissed his cabinet and protests are taking place at the offshore banking island which tends to attract ‘dubious’ money. 

The US debt situation is no better, August 2nds potential ‘time bomb’ looming and the Chicago Mercantile Exchange imposing a 0.05% haircut on US T-Bills used as collateral while the Treasury summons primary dealers to a meeting in New York today. The yield on 1-month T-Bill jumped to 14 bps from just 0.01% 1 week earlier, those maturing on August 4th ‘touching’ 0.26%, highest of all outstanding T-Bills. Meanwhile, yields at the long end dropped to their lowest in months. 

The CHF was the biggest beneficiary setting a new record at USD/CHF 0.7875, +3.9% this week alone, closely followed by USD/JPY at 77.05 prompting ‘mutterings’ from the Japanese authorities. Stock indices dropped, some at or below their 200-dmas, worst hit Italy’s MIB –6.5%, Helsinki and Paris –5.3%, Switzerland –5.0% and Spain –4.9%. Spot Gold a new high $1,637.00/oz.

Published: 26 July, 2011
written by: Bill Hubard , Chief Economist at Markets.com