08 September 2010 at 7:56 GMT
Themes
Risk sold off as the European sovereign debt crisis reached new heights amid 'new' information about the EU stress tests. European banks and their balance sheet challenges given their holdings of European sovereign debt will stay in focus in markets. If one or several of the upcoming auctions in European sovereign debt should fail, then this theme will be accelerated.
We have been skeptical all along on the result of the stress tests and aired this opinion. And indeed the hard evidence delivered at that time by Goldman Sachs said that 39 out of the 91 investigated financial institutions should have failed in the stress test instead of just seven. Whenever the sovereign debt crisis rears its ugly head risk swiftly sells off - and we don’t blame the market. The utility of stress tests – as we have mentioned again and again – was questionable and given our below consensus expectations for the euro-zone it’s only a matter of time before things turn serious enough that a couple of ‘better than expected’ US macro reports cannot help anymore.
Market Musings
German factory orders weren’t impressive yesterday as they declined 2.2% MoM in July. Was that it for the German recovery or just a minor blip in the road? While we don’t think the German locomotive has lost all its steam yet, it cannot continue to pull the Eurozone economy all by itself. Remember, the euro-zone is Germany’s largest export market and no gains from EUR depreciation are helping German exporters inside the zone. Instead, consumers in other Eurozone countries must pick up the tap, which is difficult when they struggle with a combination of austerity measures and high unemployment and debt levels.
Today we are treated to another German number, namely Industrial Production, which is expected to increase 1% MoM according to consensus. Factory orders generally leads production by 2-4 months, so judging by yesterday’s disappointing factory orders report, the pace of production growth should slow in the coming months.
The Bank of Canada is expected to raise its headline rate by 25bps to 1.00% according to consensus following yet another month with mostly good economic reports. Analysts are not unanimously looking for a hile though with one-in-four analysts instead expecting unchanged rates. Building Permits, released at the same time as the BoC rate is announced, are expected to decline, but they are generally very volatile MoM.
Japan reported a bunch of data in overnight trading and the JPY is up roughly 0.5% against the USD. The JPY599.6bn auction in 30-year bonds for an average yield of 1.991% only added to the positive JPY sentiment. Machine orders grew 8.8% in July and the trade balance also improved, both positives for GDP in the current quarter. Given the strong JPY in recent quarters the trade balance numbers are encouraging though that didn’t stop Finance Minister Noda from once again complaining about the strength of the Yen.
Read the Morning Kickoff.
Look at the Charts of the Day.
From the Video Archive, Eurozone Stress Tests: A Walk in the Park
9 July 2010