As London left for the weekend on Friday, ratings
agency Fitch was busy downgrading Italy by one notch to A+ (outlook
negative) and Spain by two notches to AA- (watch negative). Further
warnings for Portugal and Belgium added to the gloom and after a day of
what had been relatively positive (from a risk point of view) after a
better than expected employment report from the U.S., sentiment soured
into the close.
Q3 earnings focus - impact of slowdown on corporate America
In reality, whilst the U.S. data was above expectations a monthly payroll rise of 103k is only at half the level needed to keep the unemployment rate static and hence any relief rally on the back of the data should have been just that – a relief – however the backdrop is still fragile. As the week progresses the focus will move clearly towards equity market sentiment as the Q3 earnings season in the U.S. begins in earnest and the market gets the chance to digest the ‘real’ impact on corporate America of the global economic slowdown that has plagued confidence and consumer spending.
Righting the wrongs of the Eurozone
The real news over the weekend however was the Franco German summit where once again Merkel and Sarkozy met with the aim of righting the wrongs of the Eurozone (despite the fact that until now all they have succeeded in doing is ‘writing’ the wrongs of the Eurozone).
Merkel and Sarkozy claimed that they have a plan ready for the G20 summit on 3 November, a plan that “will confront the crisis”. Germany and France declared their will to turn the Eurozone into a ‘stability union’, agreeing to defend banks, keep Greece in the Eurozone and have joint responsibility for the euro. Herein lays the issue – responsibility.
Potential hurdles ahead
Whilst the ‘Merkozy’ plan to solve the banking crisis appears acceptable to them, the market will quickly want comprehensive answers to many questions surrounding the ‘plan’. Initially a couple of potential hurdles spring to my mind (i) Merkel stated that “EU treaty changes will be required” – This in itself leads to uncertainty as we have witnessed with the ‘agreement’ on the expansion of the flexibility of the EFSF, which was agreed on 21 July and has still not been ratified through the EU national parliaments. (The Slovakian vote will be watched very closely this week in this regard.); (ii) Merkozy has also stated that they have agreed on a bank capital ‘total’. This invites the market to dream up scenarios where the ‘total’ will not be sufficient – much like the EFSF and the concern that it would not be big enough to support Italy or Spain (let alone both); (iii) Finally, in financial markets, three weeks is a very long time and until a plan is announced and the implications can be understood by the markets, uncertainty remains and as I have discussed on many occasions over recent weeks, uncertainty is the biggest drag on confidence and hence global activity at the moment. Fear will remain.
“Mismanagement of Europe’s Sovereign Debt crisis may cause a regional slump worse than a regular recession” – Fiat CEO
Initially, the announcement that there ‘is’ a plan for Europe (and the action taken on Dexia to nationalise and split the bank up), has been seen as a positive for risk assets. As the week progresses I would imagine that the market will begin to need more detail on the proposals and U.S. earnings data will become the key focus for risk assets. On the data front U.S. retail sales and the U.K. employment report will also be keenly watched.
Q3 earnings focus - impact of slowdown on corporate America
In reality, whilst the U.S. data was above expectations a monthly payroll rise of 103k is only at half the level needed to keep the unemployment rate static and hence any relief rally on the back of the data should have been just that – a relief – however the backdrop is still fragile. As the week progresses the focus will move clearly towards equity market sentiment as the Q3 earnings season in the U.S. begins in earnest and the market gets the chance to digest the ‘real’ impact on corporate America of the global economic slowdown that has plagued confidence and consumer spending.
Righting the wrongs of the Eurozone
The real news over the weekend however was the Franco German summit where once again Merkel and Sarkozy met with the aim of righting the wrongs of the Eurozone (despite the fact that until now all they have succeeded in doing is ‘writing’ the wrongs of the Eurozone).
Merkel and Sarkozy claimed that they have a plan ready for the G20 summit on 3 November, a plan that “will confront the crisis”. Germany and France declared their will to turn the Eurozone into a ‘stability union’, agreeing to defend banks, keep Greece in the Eurozone and have joint responsibility for the euro. Herein lays the issue – responsibility.
Potential hurdles ahead
Whilst the ‘Merkozy’ plan to solve the banking crisis appears acceptable to them, the market will quickly want comprehensive answers to many questions surrounding the ‘plan’. Initially a couple of potential hurdles spring to my mind (i) Merkel stated that “EU treaty changes will be required” – This in itself leads to uncertainty as we have witnessed with the ‘agreement’ on the expansion of the flexibility of the EFSF, which was agreed on 21 July and has still not been ratified through the EU national parliaments. (The Slovakian vote will be watched very closely this week in this regard.); (ii) Merkozy has also stated that they have agreed on a bank capital ‘total’. This invites the market to dream up scenarios where the ‘total’ will not be sufficient – much like the EFSF and the concern that it would not be big enough to support Italy or Spain (let alone both); (iii) Finally, in financial markets, three weeks is a very long time and until a plan is announced and the implications can be understood by the markets, uncertainty remains and as I have discussed on many occasions over recent weeks, uncertainty is the biggest drag on confidence and hence global activity at the moment. Fear will remain.
“Mismanagement of Europe’s Sovereign Debt crisis may cause a regional slump worse than a regular recession” – Fiat CEO
Initially, the announcement that there ‘is’ a plan for Europe (and the action taken on Dexia to nationalise and split the bank up), has been seen as a positive for risk assets. As the week progresses I would imagine that the market will begin to need more detail on the proposals and U.S. earnings data will become the key focus for risk assets. On the data front U.S. retail sales and the U.K. employment report will also be keenly watched.
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