Spain will be a critical focus as the vice-like grip of endless recession tightens the noose surrounding Madrid's government. Prime Minister Rajoy remains under intense pressure to accept an international bailout in an attempt to break the stranglehold. If Spain does comply, the Euro would be likely to spike higher, but the positive impact would reverse quickly with the Bank of Japan and Swiss National Bank again having to combat currency strength. If Spain delays, market pressures will only intensify.
Even with a bailout package, Spain would still face recession and deflationary spiral and eventual Euro-zone exit as bad debts continue to multiply under fiscal austerity. The government would also be forced to cut pension benefits as part of any bailout deal which would intensify domestic political stresses. Although media reports may be exaggerated, the underlying mood is increasingly hostile.
The Euro-zone desperately needs to try and keep ahead of the game and there will, therefore, be intense pressure to defuse the impending crisis and force Spain to act before key events on Friday, especially as this would allow the ECB to start buying peripheral bonds. Even if sentiment can be stabilised, any unilateral action for Spain would also increase market attention on Italy and is only an exercise in buying time.
The full bank audit results for Spanish banks are due to be announced in the Wyman Report on Friday and the government is continuing to take the line that the full bank stress-test results will show a capital requirement in line with preliminary estimates of around EUR60bn. There will, however, be fears that the final estimate will be higher, especially if tax credits are not included. There will be fears that the further economic deterioration seen since June will trigger an upward assessment of capital shortfalls.
If it appears that the stress tests have been fudged in order to meet the EUr60bn estimate then there will also be a negative market reaction. Spain's optimism both over a surplus and the possibility of diverting spare funds elsewhere from the maximum EUR100bn agreed with the EU is liable to be short-lived.
The government is also due to announce its provisional budget proposals on Friday amid further rumours of pension freezes as part of a bailout package as the budget continues to overshoot. As if this toxic combination was not enough for Spain, there are growing regional tensions as the central government remains locked in a battle with regional governments. Catalonia will react bitterly to the rejection of fiscal autonomy amid increasing calls for independence.
Greece will be a significant focus, especially following the media reports on Friday which suggested that there would be no decision on the EU-IMF Greek deliberations until after the November US presidential election. Although the reports were denied, there will be a high degree of suspicion that the US administration is looking to avoid bad news ahead of the election. The inevitable conclusion will also be that there will be a very negative report surrounding Greece, if not there would be no need to delay publication.
The German IFO index will be released on Monday and this survey has been generally resilient over the past few months. There will be greater interest in what are relatively second-tier data releases for the Euro-zone. The latest flash consumer inflation release is due on Friday and a weaker than expected reading could be the green light for the ECB to cut interest rates at the October meeting.
The latest Euro-zone money supply and credit data will also be watched closely on Thursday. The most recent releases have recorded a pick-up in monetary aggregates, especially narrow money and there has been some improvement in peripheral economies. If this can be sustained, there will be a glimmer of hope for the 2013 outlook. In contrast, any renewed deterioration would be an important signal that the end game is approaching.
There will be continuing fears surrounding the global economy. Hopes of global central bank action will be offset by fears over a lack of policy effectiveness and growing powerlessness by the banks. Central banks will continue to battle against the contractionary forces of financial de-leveraging and trade tensions. Game theory will be important as individual national governments find it impossible to ignore domestic pressures of protectionism and supposed national interest even if the collective requirement needs an international stance to resist trade barriers. If political tensions intensify, there will be an even higher risk that global growth conditions will falter as the slide towards protectionism picks up pace.
The latest US consumer confidence data will be released on Tuesday with new-home sales figures on Wednesday, but the Thursday releases will be the most important. Given the Fed's increased focus on the labour-market, jobless claims have inevitably ratcheted higher in importance.
The latest durable goods orders data will also be released and will have an important impact on US and global confidence. The most likely outcome is for a sharp headline decline following the transport-induced strength last month and the underlying figure will have greater medium-term resonance. Following a decline of 0.6% last month, another drop would reinforce market fears surrounding US growth and global recovery prospects.