Germany’s ZEW Survey of
investor confidence headlines the economic calendar in European hours,
with expectations calling for the closely watched “Economic Sentiment”
component to deteriorate for the fifth consecutive month in July to
yield the weakest reading since September 2010. The while the outcome
would reinforce existing downward pressure on the Euro,
it is unlikely in and of itself to spark significant volatility given
already substantial recent selling of the single currency, unless a
better-than-expected result crosses the wires and sparks profit-taking
on some outstanding short-EUR exposure.
With that in mind, an upcoming Spanish bond auction
ought to prove far more interesting. Spanish lenders appeared to be the
weakest of the bunch in the (admittedly very flawed) EU bank stress
tests released last Friday, and may prove to require public support down
the road. This directly links the central destabilizing weakness of the
Spanish economy – the banking sector – with the government’s ability to
raise capital from the financial markets at manageable cost. As such,
traders will pay close attention to the auction’s outcome as a
referendum on the near-term possibility of deepening crisis in the Euro
Zone’s fourth-largest economy, an entity arguably too big to be bailed
out with the existing EFSF rescue fund.
Currency markets were broadly in consolidation mode
overnight despite continued selling across Asian stock exchanges, with
traders appearing to have priced in currently available information on
the two festering sources of uncertainty – lingering Euro Zone sovereign
default risk and ongoing political deadlock surrounding the raising of
the US legal debt limit – and now waiting for the next major inflection
point. The Euro narrowly underperformed, down as much as 0.3 percent on average against its top counterparts. The Australian Dollar started the session on a high note but gains were quickly cut short after minutes from July’s RBA policy meeting showed the central bank was in no hurry to raise interest rates.
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