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With currencies and equities up across the board this morning and European bond yields down, this busy trading week has started off on strong footing. However, the magnitude of the rally in the euro and other high yielding currencies shows that investors remain skeptical about European leaders' abilities to provide any tangible solution for the region's debt crisis. Lets start by saying that everyone should take off their rose colored glasses because this will not be the meeting to end all meetings. Based on the agenda for the EU Leaders Summit, the focus will be on greater fiscal cooperation and governance which would be helpful in the long run but fail to satisfy the appetite of traders who are waiting with bated breath for any type of monetary commitment.
The rumor mill is on full blast this morning with talk of the Fed and 17 central banks from Europe providing a triple digit billion dollar loan to the IMF and the ECB working on a trillion dollar intervention plan for the European bond market. Central banks will most likely continue to provide more liquidity to the market by cutting interest rates. We expect both the European Central Bank and the Reserve Bank of Australia to lower rates by 25bp this week. The ECB already noted that they have no interested in increasing bond purchases but they could extend unlimited short term loans to banks. With the central bank meeting on the same day as the EU Leaders Summit begins, ECB President Draghi will most likely leave the door open to more stimulus which could weigh on the EUR/USD if EU Leaders come up short again.
U.S. non-manufacturing ISM is scheduled for release at 10:00 AM ET this morning but we do not expect it to be very market moving given that payrolls were released on Friday. The only country without any major event risk this week is the U.S. and for this reason the only thing that will matter to the dollar is risk on or risk off. Demand for safety will be single most important driving factor for the greenback this week and there is a good chance safe haven flows will ease ahead of the EU Leaders Summit on Dec 8 and 9 and depending upon the outcome, safe haven demand could return the following week. This morning's meeting between Merkel and Sarkozy will be very important in setting the stage for the EU Summit but given Merkel's attempts at downplaying significant progress, the chance of the two most powerful leaders in Europe putting up a cohesive and decisive front is slim. In the meantime, investors are happy with the austerity measures announced by Italy's new Prime Minister Monti's and they are rewarding him by driving Italian 10 year bond yields lower and taking the EUR/USD higher. The EUR30 billion plan is a lot to swallow but it is also what is needed to bring down the country's burgeoning debt levels. Every single day this week will be a busy one with investors hanging onto the hope for major monetary and fiscal policy changes and their optimism could help keep currencies and equities bid.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.