EUR to be bullied lower?

Ongoing fears about European debt continue to dominate market sentiment. Rating agencies are already doing their bit this week, by adding pressure in warning on the future of the Euro-zone. The agencies rarely bring us good news in this trading environment, but seem happy to deliver bearish news in some of the most “delicate” of times (just ahead of the EU summit). Market concerns over possible rating downgrades and the absence of a ‘lender of last resort’ is expected to lean heavily on risk appetite well into the New Year. Because we are in December, it’s difficult for many participants to strap on massive risk positions in a low-liquidity and volatile environment.

The disappointment about last week’s EU deal is evident in financial markets. Global sentiment has soured even more from rating agency comments that EU leaders have not done enough to contain this debt crisis. Last night, Japan publicly acknowledged that it would only consider support for Europe if leaders can come up with a “concrete scheme.” Despite Japan having its own problems, a G7 member providing a publicly damning verdict on events in Brussels suggests that Euro leaders are no closer to the solution of how their sovereigns will be capable of rolling over billions worth of maturing Euro debt early next-year. Earlier this morning, despite higher yields, Spain successfully auctioned its Bill requirement. Over the next week there is a good amount of global product coming to market that requires absorption.

Overnight, rating agencies have not let up. Moody’s placed eight Spanish banks on review for possible downgrade, citing domestic economic weakness and an ailing commercial real estate market. These reasons are only ever going to become more dominant with the threat of the Euro-zone dipping into recession come the New Year.

The market expects a “steady” Fed and robust US retail sales print later this morning. The FOMC meets today, and with US data having improved and European stress “reasonably” contained so far, the market sees little need for policy change this week. The likelihood of QE3 occurring is easing in recent weeks, as manufacturing, labor and confidence reports have mostly surprised to the upside. The possibility that the US economy is on an even keel can only be positive for the greenback.

German ZEW Economic Sentiment improved (-53.8) this morning despite the market expecting another pull back on thinly veiled optimism that Euro leaders will find a resolution to the regions’ debt crisis. It was capable of rising for the first this month in nine consecutive readings. The ZEW believes that the decline for economic sentiment has probably bottomed out. Obviously, they are unaware of how threatening and damaging rating agencies are; they are the “piranhas” of the credit world. The current conditions’ index fell to 26.8 from November’s unrevised 34.2. If nothing else, the surprising data will provide the market a better opportunity to own the dollar. However, evidence of lack of market conviction will have to wait for the retail sales print.

Other Links:
Euro Summit Failure Underscores Need for Sovereign Default

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