Over the past couple of weeks, markets attention has been divided over major global subjects. Indeed, after the impressive equity markets rally we witnessed over the past couple of months, investors sentiments have turned slightly negative and participants have started to worry about global markets for several reasons. The US earning season has just took off and is causing investors’ uncertainty, the IMF has just cut its projection for global growth, while Japan and China tensions continue to weight on Asian markets and threaten to create a trade disruption between both countries.
In Europe, the never-ending crisis is casting doubt over the Spanish situation and investors are still wondering whether Spain will request assistance from the Eurozone. While Spanish yields continue to fall, S&P credit rating agency cut the rating on Spanish bonds to BBB- while retaining its investment grade status. In the Middle East, geopolitical tensions surrounding Turkey, Syria and Iran have pushed oil prices to high levels, which in turn have a potential negative effect on markets sentiments.
Although investors remain hesitant over the global market situation, currency investors appear reluctant to fight the endless liquidity injection from major central banks and continue to sell the US Dollar against a basket of major currencies
After starting the week over the 1.30 level, Euro broke down to reach a low of 1.2826 after Spain’s ratings downgrade. However, positive risk sentiment by the end of the week pushed the currency higher to end the week at 1.2951.
The Sterling Pound had a similar performance starting the week above the 1.61 level, reaching a low of 1.5977. The currency ended the week back above the 1.60 level.
On the Asian side, the Japanese cabinet office cut their assessment of the economy for the third month in a row, and Moody’s rating agency noted that the Japanese political stalemate raised concerns over the country’s debt outlook. Additionally, Japan Prime Minister mentioned that the Yen strength was out of step with the state of the Japanese economy. The Yen closed the week on the weaker side at 78.45
Modest Growth in the US Described in the Beige Book: The US Federal Reserve’s Beige Book report released this week said that consumer spending had grown flat but the overall recovery was advancing modestly. Several Districts continued to report shortages of highly skilled workers, but otherwise wage pressures remained modest. A number of Districts characterised retail sales as expanding at a modest pace. On the other hand, residential real estate conditions improved since the last report. Most Districts reported strengthening in existing home sales, while prices were described as steady to increasing.
Conditions in the manufacturing sector were mixed but, on balance, somewhat improved since the last report. Overall loan demand was steady to stronger in most Districts and credit standards were little changed since the last report.
Philadelphia Fed President Warns on Sending the Wrong Inflation Signals: In a speech given this week in Pennsylvania, Charles Plosser, president of the Philadelphia Fed said keeping the federal funds rate so low for so long “would risk destabilising inflation expectations and lead to an unwanted” rise in inflation. Criticism over the Fed intention to keep interest rates ultra low for another three more years in order to spur growth and cut the jobless rate at the expense of a potentially higher inflation, has caused many investors to put the credibility of the Fed at risk.
Europe & UK
ECB Not Willing to Repeat Greece Debt Restructuring: One of the top ECB members, Christian Noyer mentioned that Greece debt restructuring remained a “unique case” and “there would not be another restructuring in the Eurozone.” Noyer also said the ECB wanted to “eradicate fear” that other countries will restructure their debt.
Italy Tries to Ease the Burden from the Austerity Measures: After a big plunge in his popularity due to the severe austerity imposed in the country, Italy Mario Monti’s government unexpectedly cut the income tax rates for the country’s lowest earners and promised to stick to the budget goals it has agreed with the European Union. The government said it would also halve a planned increase in sales tax rates to a single one percent.
On the positive front as well, Italy was able to sell 3.75bn Euro of its benchmark 3-year bond this week, meeting the target allocation amount. The average yield rose to 2.86 percent, more than the 2.75 percent reported in the previous month. The bid to cover ratio was stronger than the previous month, at 1.67 versus 1.49 in September
S&P Downgrades Spain by Two notches to BBB-: S&P downgraded Spain by two notches to BBB-, just at the edge of investment grade rating. S&P also retained the negative outlook on the sovereign rating. The agency cited concerns over growth and fiscal picture along with policy actions as the reasons for the downgrade. Spain however retains an investment grade rating from all three rating agencies with Moody’s at Baa3 and Fitch at BBB. In terms of market impact, the downgrade is clearly negative for Spain, however, the market have been more focused on Moody’s, which is potentially due to review the country’s rating by month end.
Basel Banking Rules may be Delayed by a Year: In an effort to alleviate the pressure on its banking system, newspapers reported that the European commission is urging legislators to postpone their demands for detailed rules on bank liquidity. European Central Bank President Mario Draghi has also criticized the proposed standard, saying it discourages banks from lending to each other. The new rules would require banks to hold enough easy-to-sell assets to survive a 30-day funding squeeze.
Asia
Australia Shows Stronger Hiring but lower Unemployment Rate: The Australian labour report showed a stronger employment gain than market expectations where data showed an increase of +14.5k versus expectation of 5k but with a weaker unemployment rate at 5.4 percent versus 5.3 percent expected. The report was a close opposite of the August report, which showed softer employment growth but a stable unemployment rate.
Japanese Companies Using the Stronger Yen for Acquisition Purposes: Newspaper reported this week that the Japanese telecom company Softbank is likely to spend JPY 2trn to buy the US company Sprint. The deal would be the largest outbound acquisition in Japanese M&A history. The news has initially put some pressure on the Yen but the deal remains a very far event for now.
On the other hand, the Japanese economy continues to suffer with machinery orders weaker than market expected. The downturn was mainly attributable to a 15.1 percent slump in orders from manufacturers. Export orders fell by 14.7 percent, and external weakness had been more noticeable than domestic since March.
Kuwait
Kuwaiti Dinar at 0.28090: The USDKWD opened at 0.28090 on Sunday morning.
The Peninsula
