TWO STEPS FORWARD, ONE STEP BACK? – ASHBURTON

James Qualtrough | October 3, 2012 | 0 Comments

Ashburton’s head of Asset Allocation, Tristan Hanson comments on the current situation in the Eurozone:

Following the announcements last week of the 2013 budget and a structural reform program largely in line with EU recommendations, investors are remaining on tenterhooks in anticipation of whether Spain’s Prime Minister Rajoy will request EFSF/ESM assistance, thereby paving the way for ECB bond purchases. There has been no sign of this widely expected event as yet. It is possible Mr Rajoy will stall until after regional elections in Galicia and Basque Country on 21st October, but only he can know for sure.

As the economist Karl Whelan notes, in the Euro area “no good deed goes unpunished” – after good news that the ECB is ready to buy government bonds under certain conditions, a joint German-Dutch-Finnish statement looks to have backtracked on the move towards banking union.

Back in June, hopes were raised of the creation of a euro area banking union under a single supervisor, the ECB. This, it was hoped, would finally break the toxic link between periphery banks and their sovereigns. Direct bank recapitalisations by the ESM bailout fund would remove the burden from individual sovereigns, sharing the pain around the region. But the German-Dutch-Finnish statement argues that (i) “legacy assets should be under the responsibility of national authorities” and (ii) the ESM should only be used as a “last resort” if private and public capital injections are impossible.

Nothing more than a tough bargaining stance? Possibly, but also a timely reminder that nothing in Europe moves in a straight line. If these core AAA-rated countries are unrelenting on this point, it would be bad news both for Spain and Ireland, where hopes had risen that the cost of the €64bn bailout of Irish banks and the planned €100bn for Spanish banks could be shifted from the government books to the ESM.

On Friday, the Oliver Wyman stress test results for Spanish banks were published in detail, estimating a €59bn capital shortfall overall under a stress scenario (with 7 of the 14 largest banks showing a capital shortage). This was in line with expectations. The amount of public aid required will be moderated by the ability of the troubled banks to boost capital privately and today Banco Popular kicked that process off by announcing a €2.5bn rights issue.

It’s a big week for central bank news starting with the Reserve Bank of Australia decision on Tuesday; decisions from the ECB and Bank of England on Thursday, along with minutes of the Fed’s last meeting; and the Bank of Japan’s rate decision on Friday. No changes are expected from the major central banks meeting this week.

PMI manufacturing survey data in China and Europe this morning did little to change current views of a difficult economic backdrop.

Some key US indicators are released this week including ISM surveys (Monday – manufacturing; Wednesday – non-manufacturing) and Friday’s unemployment report. The market expects 115,000 jobs to have been added in September with an uptick in the unemployment rate to 8.2%.