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EUR/USD has nearly erased Friday’s losses and Asian equities are narrowly mixed....

Monday, October 22, 2012 3:56 AM GMT

 Good Morning ,


-  EUR/USD has nearly erased Friday’s losses and

Asian equities are narrowly mixed.  China's Shanghai Composite shed -0.14%, South Korea's Kospi fell -0.12%, Tawian Weighted dropped -0.48%, and Australia's S&P/ASX 200 closed down by -0.66%, but Hong Kong's Hang Seng gained +0.63% and Japan's Nikkei Stock Average rose +0.09%. 


Overnight, sentiment in Asia is rather constructive especially when taking into account the heavy losses on Wall Street on Friday. EUR/USD trades with an upward bias and the US Note future is under some pressure in the Asian session. 


-  On Friday, a risk-off climate linked to US earnings disappointments (partly

published in late trading Thursday) dominated trading in all markets and led to

extra profit taking in EUR/USD. Commentators added disappointment after the lack

of breakthroughs at the EU Summit as an additional trigger, just like another

statement of Rajoy that he is in no hurry to ask for a precautionary bailout package.


On Friday, global core bonds were in correction mode following heavy losses recorded earlier that week. The healthy correction came on the back of a huge sell-off in (especially) US equity markets . The US yield curve bull flattened with yield changes between -0.4 bps (2-yr) and -8.5 bps (30-yr). In Germany, the curve shifted in a similar fashion, with yield changes flat (2-yr) to 5.8 bps lower.


-   Intraday, Spanish bonds suffered a minor blow following

German Chancellor’s Merkel comments in which she ruled out retroactive bank

recapitalizations by the European rescue fund. The comments however didn’t

harm Irish bonds. In Ireland, PM Kenny faced a wave of criticism over the

weekend as the Merkel quote appeared to throw a spanner in the works of

attempts to improve Ireland’s financial situation by rearranging the bailout of

the Irish banking sector. However, yesterday, Kenny and Merkel issued a joint

statement saying that Ireland is a special case and affirming that Europe

remains committed to splitting Ireland’s banking and sovereign debts.


-  Over the weekend, there were Spanish regional elections in Galicia and the Basque Country. PM Rajoy’s PP party increased its absolute majority by three seats in Galicia, which is seen as a first thumbs up for managing his country through the crisis. 


-  Spain’s Balearic Islands and Asturias became on Friday the latest regions to ask

the central government for aid, raising concerns that the country may have to

expand a €18 billion fund set up to help pay regional debts.


-  Fitch Rating said on Friday it could be approaching a point where it would

remove its negative outlook on Ireland’s BBB credit rating, although the rating

is likely to remain unchanged for some time.


-  Rating agency Standard & Poor’s revised on Friday its sovereign credit outlook

for Estonia to stable from negative and affirmed its AA- rating citing significant

fiscal buffers to guard against a prolonged euro zone economic slump.


In Greece, the coalition government continues talks with the Troika. The aim is to conclude negotiations as soon as possible so that the Greek parliament has voted on the measures by the time the Eurogroup meets on Nov 12 (potentially an extra meeting will be held on Oct29 to discuss the assessment from technical officials). Over the weekend, FM Stournaras said Greece has covered over 90% of the ground it needs to in order to secure the next €31.5B aid tranche.


Today, the eco calendar only contains a second revision of the 2011 EMU government/debt to GDP ratio. Looking to trading further out this week, economic data in EMU, PMI’s and IFO on Wednesday, should tell us whether also the euro area economy is showing signs of bottoming out/recovery, as US and Chinese data suggested recently. UK Q3 GDP is also worth looking at. The US eco calendar is less enticing at least until Friday when Q3 GDP is released.


The FOMC decision on Wednesday will probably pass without fuss (see our weekly Pulse later today), but ECB Draghi’s performance before the German parliament (+ teleconference) also on Wednesday will draw a lot of attention. Will he succeed in convincing the German parliamentarians (and the population) that with the OMT programme, the ECB stays within its mandate? 



-   Have a nice week ! 

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