GO Markets FX Analysis | Fiscal cliff negations re-enter the frame; The global week ahead

Fiscal cliff negations re-enter the frame; volatility assured

US stocks recorded a fifth consecutive day of gains in a shortened trading week, as investors mulled stronger prospects of successful fiscal cliff negations, a cease-fire in the Middle East, amid light Thanksgiving holiday volume. In shortened ‘Black Friday’ trade, markets were also suitably encouraged by a pick-up in German IFO data, showing all three components of the series improved beyond expectations.

Amid the conjecture surrounding the US fiscal cliff, markets will have a wealth of data directives to key off in addition to a handful of closely watched Fed speeches. Consumer spending will also be watched as a barometer of economic health with ‘Black Friday’ marking the unofficial start of the Christmas season, in turn, setting the tone for holiday spending. Top tier release on the docket this week includes durable goods orders and consumer confidence data (Tuesday), third-quarter GDP (Thursday) and personal consumption expenditure on Friday. Releases on the health of housing, Fed’s Beige Book, regional manufacturing gauges, and weekly jobless claims will also be a key sentiment driver.

Year end flows and easing liquidity may also serve well for volatility in the coming weeks, with any market moving themes likely to be exacerbated. President Obama will also step-up negations with Republicans in effort to strike a deal on the fiscal cliff. While early stage negations appear on the right track – at least publicly – it’s clear progress will be painfully slow, and the arduous and elongated process will intermittently take some of the sheen off last week’s solid performance.

Euro enjoys bullish momentum on Greece ahead of key meeting

As always, Europe will be a key sentiment barometer this week and true to recent form, Greece will be at the top of the list with finance ministers, the IMF and ECB scheduled to meet this evening. The Euro forged ahead over the course of last week, despite a lack of closure surrounding Greece’s much needed bailout installment. Although talks between Europe’s elite have thus far yielded little public result, there remains an element of faith that leaders will bridge the impasse in a meeting scheduled for this evening. There’s also talk of Germany easing from their hard-line stance over debt forgiveness for Greece, suggesting a deal could be struck in the distant future where Germany may be willing to take a haircut on Greek debt. Still such a plan would be politically untenable before the Federal Election in late 2013, given the deep-seated resistance from the German people.

Euro-group finance ministers, the IMF and the ECB are attempting to bridge a gap on the time frame Athens has to reduce their budget deficit. Recent weeks have seen the IMF’s Christine Lagarde raised concerns over the Euro-group decision to extend Greece’s budget targets by two-years, giving Athens until 2022 to reduce their debt to GDP ratio to 120 percent. We anticipate a deal will be struck on Monday, paving the for at least 31.5 billion euro’s of bailout funds, and believe reports of additional ‘bundled’ bailout funds have merit.

The Euro wrapped up the week in strong form, with a break through points of resistance to close the week a solid 1.8 percent in the black. After a period on the back foot, bullish momentum set in for the Euro last week, slicing through the 200DMA and beyond $US1.29 figure on Friday. Nevertheless, one may perceive the latest rally has an element of blind faith built in, with the ‘good news’ expected to come on the back of the Euro group meeting well and truly priced in. While closure to Greece’s bailout instalment and a possible deal to slash funding costs may induce a relief rally beyond $US1.30, it appears such a rally would be tentative at best unless ‘fresh’ positive news is put on the table, otherwise a period of consolidative behaviour appears the next logical phase.

Political risk in Spain presents Euro headwinds

There’s also political risk to wade through this week in Spain, with the autonomous region of Catalonia going to the polls yesterday in what effectively paves the way for a separatist drive by Catalonia’s leader, Artur Mas. Exit polls suggest Mas’s Convergence and Union Party have received the tick of approval from Catalan voters, with a referendum on independence expected to be called should initial polling estimates prove correct. Whatever the case, it’s the last thing Spanish PM Mariano Rajoy needs at this juncture, with Catalonia making up about 20-percent of Spain bottom line. Nonetheless, were likely to see Rajoy shroud Catalanio’s bid for independence in legal red tape, arguing the separation is unconstitutional.

Aussie looks to key sentiment barometers; bullish momentum to fade in the absence fresh ‘good news’

The Aussie dollar closed the week an overall 1.16 percent in the black, enjoying another solid days of gains on Friday, albeit in light volume. A strong performance from US equities placed the local unit in the best possible position to forge higher last week, however technical headwinds and the cyclical peaks and troughs across global markets, may see the overstretched Aussie dollar enter a period of consolidation. A quiet week on the local docket will see the risk trends abroad take precedence, still, there are some mid-tier releases to take up the slack, with new home sales data and private capital expenditure and private sector credit data to cement a case for or against an interest rate cut at next week’s meeting.  China will once again be closely watched with the leading index and industrial profits due for release on Tuesday and the closely watched official manufacturing PMI on Friday. Markets responded in kind last week after a gauge of manufacturing in the region signaled a return to growth, with the HSBC PMI release rising to 50.4 in October, from a previous 49.5. This marked the first time in 13-months the indicator has been in expansion territory.

 

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