One issue Tim Geithner nailed on Tuesday was to suggest that the posturing and prevarication of the EU has to stop. He stated that the predicament was; “the biggest challenge to growth worldwide, we want to see details, not just the objectives, and the primary burden falls on the Europeans.” The time for talk is over, the only colourful ‘management speak’ language acceptable from here on in is; a bullet proof blueprint, combined with a roadmap containing a lay out of milestones and proof of how they’ll be reached and dealt with once the destination/s is/are reached.
The blue sky thinking whilst painting pictures in the same sky needs to stop, the perception management technique has no further to go now shoes such as Italy are beginning to drop. The announcement from Italy this morning that its premier Berlusconi is arranging to step down, in order to allow a general election to take place in early 2012 may temporarily soothe the markets until the full ramifications and motives are analysed. This could be translated as a dereliction of the current parliament’s duty rather than a noble act of democracy.
Berlusconi is apparently arriving in Brussels today with a letter of intent for his fellow EU officials from his government that the reforms agreed in the summer months will now go much further. Berlusconi’s letter outlines Italy’s plan for reforms demanded by its EU partners as a condition for buying its bonds, but questions still linger as to whether or not these enlarged commitments will be enough to restore market confidence. The euro zone’s third biggest economy is now finally routed at the centre of the debt crisis as investors finally become increasingly concerned with regards to its poor growth projections and continual political instability. Italy needs to issue some €600 billion in bonds in the next three years in order to refinance maturing debt. A sobering thought is that Greece only has a figure of approx. half that as outstanding bond debt to its debtors..
EU officials, European diplomats and finance ministers have lowered their expectations of a breakthrough when the 17 euro zone leaders meet later today, despite the Franco-German assurances only weeks ago that a “comprehensive solution” to the economic turmoil would be found by the end of October. There is only general consensus on the need for €110 billion euros to be injected into the European banking system to help it withstand a Greek debt default and wider financial contagion, there is no clarity or detail on either of the other two critical parts of the plan.
There are two key stumbling blocks, the first involves leveraging the region’s €440 billion euro bailout fund, known as the European Financial Stability Facility to ‘insure’ against further losses by contagion and discovery, (figures suggested for the total package vary between €2-3trillion). The other block is reducing Greece’s debt burden by deepening the losses private investors, major banks and insurance companies must take on their Greek bonds. An agreement of 21% was loosely drawn up in the summer months, the write down necessary to move past Greece and onto Italy, Spain and potentially France (given the parlous state of it’s banks) now is up to 60%. The concern could be that this level of write down and loss could set a benchmark of sorts and in further discovery could be the percentage ‘hits’ Italy’s bond holders may have to take if a solution is not found..
EU leaders will consider two methods for scaling up the EFSF, one by using it to offer guarantees to purchasers of new euro zone debt, and the other using part of its capacity to set up a special purpose investment vehicle that would attract money from sovereign wealth funds and other investors to buy debt. They might also agree to combine both options. As to who the SWFs would be, given China and the other BRICS countries are showing no appetite for assistance, remains to be seen.
Markets
Asian/Pacific markets had mixed fortunes in overnight early morning trade, the Nikkei closed down 0.16%, the Hang Seng closed up 0.52% and the CSI closed up 1.0%. The ASX 200 closed up 0.35% and the SET is down 0.54%. European bourses have been equally mixed, at 10.00 am GMT the STOXX is down 0.24%, the FTSE is up 0.06%, the CAC is up 0.07% and the DAX down 0.04%. The SPX daily index equity future is up circa 0.5%, Brent crude is down $35 and spot gold is up $10 an ounce.
Currencies
The yen once again rose towards its post-World War II high versus the dollar, concern that Europe’s leaders will struggle to find solutions to the debt crisis has boosted demand for the safer assets. The Swiss franc also gained as its safe haven status was enhanced. The Dollar Index fell toward a six-week low amid speculation a weakening economy will cause the Federal Reserve to start a third round of asset purchases, quantitative easing. Australia’s dollar slid after a report revealed that its inflation has slowed. The yen rose 0.3 percent to 75.88 per dollar at 9:30 a.m. London time, after strengthening to a record 75.74 yesterday. The currency gained 0.2 percent to 105.62 per euro. The franc advanced 0.5 percent to 87.34 U.S. cents. The dollar fell 0.1 percent to $1.3926 per euro after weakening to $1.3960 yesterday, its lowest point since Sept.
Economic data releases that may affect sentiment in the New York ‘sessions’
12:00 US – MBA Mortgage Applications
13:30 US – Durable Goods Orders September
15:00 US – New Home Sales September
The housing markets data released yesterday was disappointing, predictions are that applications and new home sales will not dramatically affect sentiment. Durable goods orders could affect sentiment given the dichotomy of very low consumer confidence is at odds with retail spending in the USA which is still strong. Analysts surveyed by Bloomberg gave a median forecast of -1.0%, compared with the last release which was -0.1%. Excluding transportation, the expectation is 0.4% (previous = -0.1).
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