EUR Headline Watching

Is it a real surprise that a Credit agency, again, hogs the limelight? Is it a motivational strategy? Do Euro-member leaders require that extra pressure to get the “job” done? It’s interesting that S&P, who has put the 15 Euro-members, including Germany and France, on credit watch negative, are involved in politics. This creates a +50% probability of ratings downgrades in the next 90-days. S&P expressed particular concern about the inability of Euro area political institutions to deal with the current credit crisis. Their “responsible” actions again have nervous investors wading to the sidelines in the opening session.

S&P is not the only culprit this morning. Capital Markets are also reacting to yesterdays Franco-German agreement reached by Sarkozy and Merkel. The key elements of their agreement are:

• Automatic sanctions for countries violating Maastricht criteria, subject to overrule by a majority vote of Euro area members.
• Acceleration of creation of the European Stabilization Mechanism to 2012
• Germany’s dropped previous requirement for private sector “bail-in” in future sovereign restructuring.

It seems that the agreement will “fall short of creating a hard veto power over national budgets for the European Commission. Instead it would require the European Court of Justice to verity golden rules, but without the power to sanction countries”. The main point is that the leaders are leading and others will be at the same table come this Friday.

This is the week for Central bank monetary decisions and the Aussies kicked off last night with an expected-25bp ease (+4.25%). It’s their second consecutive cut, and issued a relatively dovish statement. Interestingly thought, the statement gave no indication of whether the RBA thinks that monetary policy is now appropriate. In contrast, the statement seemed to focus on external risk and downplayed inflation concerns. That message seems to be the same being expressed from other emerging countries who are also considering adjusting their rates.

Governor Carney from the BoC is expected to keep his policy unchanged later this morning as the uncertain outlook for growth and subdued price pressures suggest no need for a change in the bank’s neutral monetary stance. The market will be looking for any indication of future eases. Canada is tipped as the only G7 country to hike in 2012. The loonie is outperforming on the crosses and seem well support outright on dollar rallies for the moment.

It’s back to headline watching. As price vacuums persist, the market does only what’s necessary. There is no market conviction; that will will hopefully be created and supported by week’s end.

Other Links:
EU Leaders pressure Treasuries
Make or Break for the EUR this Week?

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