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This morning The Financial Times and the Wall Street Journal published similar articles entitled “Spain prepares to make rescue request” and “Spain outlines bailout path”. The articles source and comments are attributed to an unnamed Spanish Ministry of Economy official. He said the Spanish government is being prepared to make an official aid request, but is delaying the issue by the need (potential fallout) of other countries (Italy). The formula Madrid is willing to use, is applying for a credit line that would only make money available if needed. The application would initiate OMT-buying if necessary. The official says Spain would sign up for a MoU but that there would be no additional reform measures included. We believe this would mean that the ambitious budget PM Rajoy announced last month will be similar to what the MoU says. The budget was largely praised by the EU and by ECB Draghi. A MoU without extra reforms however does not mean that there will be no conditionality to sticking to specific targets. The signing of a MoU would be the key for the ECB to activate its bond buying weapon. The article is a positive and shows that Spain effectively is moving in the direction of a bailout. It will be further digested in the media and is likely to be supportive for risk.
The Portuguese government presented next year’s budget last night. It consists of €1B spending cuts and €4.3B tax increases. The Parliament is expected to vote on the budget end-October. Negotiations for each measure will continue through November. The measures will of course have a negative impact on growth and contrast sharply with IMF Lagarde’s message over the weekend. The Greek newspaper ekathimerini reports on its website that a Troika agreement by the EU Summit is unlikely and that an extra Eurogroup meeting between the Summit and the Nov 12 Eurogroup might be called to agree on the disbursement of the next €31B loan tranche.
European FX traders had more eyes for the weekend positive comments of European policymakers (at the G7). There were more signs Greece would be kept inside EMU and rumors Spain would ask for help in November. This fed into a more risk-on sentiment. So, once European trading got going, EUR/USD nicely recouped the Asian losses, helped also by stronger European equities. This allowed the pair to set an intraday high of 1.2980 when US traders joined the fray.
Looking forward to today’s trading; we have no firm views on the US data. Industrial production may show a rebound following a very weak August figure and risks for headline CPI may be on the upside, but compensated for by subdued core CPI. NAHB housing sentiment survey should show further improvement. In Germany, ZEW sentiment should have improved for the second month. This means that at the margin eco data may support the sentiment on risk. Earnings results should shape the environment for risk today (as it was yesterday) with bellwethers Coca Cola and Goldman reporting before US opening. Some more equity gains might entice the bulls in convincing that the recent (small) correction of equities is over. However, after all is said and done, we suspect that most markets, including the FX market will remain in consolidation mode.
Overall markets are expected to remain quiet until the EU Summit, but there will be lots of press conferences, interviews, news reporting, and rumors. EU Ministers like to see their names in press so action should pick up as we get closed to the Summit.