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WEEK IN FOCUS: 29/08/11 - 02/09/11

Developments in the Eurozone are likely to remain the focus for the markets this week. The ECB has been active in the last few weeks with its SMP bond-buying programme, which has underpinned a lack of excessive rise in the Italian and Spanish government bond yields recently. However, these measures are temporary in nature and the bond-buying responsibility will ultimately be shifted to the EFSF/ESM as per the July 21st accord among the Eurozone finance ministers. Despite an agreement, the measures need to be approved by the parliament of each Eurozone country individually prior to its implementation. The month of September will see these measures going through parliaments of Germany, France, Netherlands, Slovakia, Austria and Finland. However, a smooth passage of the bill is far from guaranteed, primarily due to mutually contradictory views within coalition governments of these countries. Meanwhile, the Finnish government is adamant on its demand to get collateral in exchange for its participation in a Greek bailout, which has received sharp opposition from countries like Germany. Adding to the worries, Greece warned on Friday that it may call off a proposed EUR 135bln debt swap if fewer than 90% of private investors sign up for the deal, which in effect could see a collapse of the measures agreed by the Eurozone leaders. The Troika Commission is expected in Athens by the end of August to start a quarterly economic performance review ahead of the disbursement of a sixth tranche of Greek bailout in September, and is likely to take the latest developments into account. As a consequence, EUR and equities may come under pressure if the Eurozone debt concern escalates. We may also observe further widening of the Eurozone 10-year government bond yield spreads, which is likely to prompt the ECB to intervene in the bond market.


Across the Pond, this week is likely to be equally important in terms of the US economy. The market is still digesting Fed Bernanke’s speech in Jackson Hole last week, where the chairman refrained from declaring another round of quantitative easing; instead he guided the market towards a two-day FOMC meeting in September. However, minutes of the previous FOMC meeting is due to be released on Tuesday, which may reveal further details on the three members who voted against keeping the interest rate exceptionally low for another two years. Moreover, the minutes may also indicate discussions on further monetary easing steps, including quantitative easing, which the Fed may consider in the months ahead. The Nonfarm Payrolls report is due to be released on Friday and market participants will hope to see higher than expected figures, like the last release, as a sign of an uptrend in economic activities. The raft of economic data from the US will also include ISM manufacturing, ADP employment change, personal income/spending, and PCE core among others. Elsewhere, market participants will closely follow the impact of Hurricane Irene on the eastern coast, with New York City in particular. Supply disruptions due to Irene is likely to provide support to WTI crude futures, however a scenario of extensive infrastructure damage may see equities coming under pressure.


Looking elsewhere in terms of the economic calendar, data from the Eurozone include consumer confidence, CPI, unemployment rate and the final reading on the manufacturing PMI. In terms of fixed income, approximately EUR 34bln worth of government bonds and bills from the Eurozone are scheduled for this week. The Italian BTP and Belgian T-Bills are due on Tuesday, whereas the Spanish bonds will test the market on Thursday. The ECB’s SMP bond-buying programme has capped the yields on the Italian and Spanish government paper; however these auctions will reflect investors’ appetite for the Eurozone debt. It is also worth noting that the Democratic Party of Japan is electing its new leader on Monday, which will also decide the country’s next prime minister following the resignation of Naoto Kan.