Is a Portuguese bond auction all it takes? [HEAT]

Themes
European banks and their balance sheet challenges given their holdings of European sovereign debt will stay in focus in the market. There is no news here so far, but if one or several of the upcoming auctions in European sovereign debt should fail, then this theme will be accelerated. The market is quite nervous at the moment as emphasised by the comeback in risk following the successful
Portuguese bond auction yesterday.

What’s going on?
We expect European markets to around flat to slightly lower this morning as the concern of the European sovereign debt is wearing off. As we said yesterday this theme in markets will quickly run out of steam if no news on this would enter into the market. But later in this year when we start to get worse numbers out from the Eurozone economies this theme will resurface and by then in our view with larger relevance. Then the lack of stress in the stress test will come into play as more European banks will face difficulties with funding their daily operations. But until then everybody is sound and safe.

Market Musings
Bank of England will announce unchanged rates today as the UK economy remains weak – and will become even weaker when austerity measures kick in. Similarly the bank’s asset purchase target is expected to remain at £200bn. The manufacturing sector in the UK is still growing, but the recent Manufacturing PMI suggests weaker growth ahead as the headlnie number fell to 54.3 from 56.9.

US trade balance will be interesting from a GDP perspective. The last reported number for June hurt second quarter GDP quite a bit as imports grew 3% MoM while exports were down 1.3%. However, this could be supportive of 3Q growth if the deficit shrinks back to something similar to the April and May reports.

The Federal Reserve released its Beige Book yesterday, which while hardly surprising was nevertheless not happy news for the market: “Reports from the twelve Federal Reserve Districts suggested continued growth…, but with widespread signs of a deceleration compared with preceding periods.” Wage pressures were also said to be limited.

Australian data was better than expected as 30,900 found employment in August, which together with a declining participation rate saw the unemployment rate edge down to 5.1% from 5.2%. Clearly the Australian economy hasn’t been hurt too much yet by the (minor) reduction in growth in China, and if these sort of reports keep coming then another RBA rate hike could be in the cards at the bank’s next meeting.

Read the Morning Kickoff.