USD Boosted by QE Absence
The continued strengthening of the US dollar despite worsening US jobs and manufacturing activity, and broadening evidence of a sluggish China results from market realization that the Fed’s shortened and sterilized QE (Operation Twist) deployed until year-end will be inadequate in addressing the unavoidable deterioration in global activity. As long as the presence of Operation Twist prevents any new QE program, equities rebounds should remain contained, commodities to probe further downside (led by oil until grains turnaround) – all alongside a rising USD. Throughout, gold and silver compete for which is the preferred dead-cat bounce.
Spain’s ability to secure a one-year extension of its deadline to attain a 3.0% debt/GDP target and to obtain €30bn from the €100bn bailout is a sufficiently good reason for Spanish and Italian 10-year yields to post their biggest one-day decline in eight days.
German judges discussing the constitutionality of the ESM bailout fund are making sufficient noise to signal to Berlin that it must consult Parliament more thoroughly before tying State resources to eurozone assistance. But markets are well aware of the ESM’s increased importance in containing borrowing costs (via its possible use to purchase bonds and direct bank recapitalisation) and relieving debt off the sovereign table. Full ESM ratification can only go forward.
While the challenges of sovereign access to debt markets and the adequacy of firewalls remain unresolved (Spain and Italy 2013 debt requirement of +€600 bn exceed € 400 bn ESM), concepts such direct recapitalization and target extensions are considered as welcome positives to the eurozone crisis. This is especially the case as Euroleaders have vowed to introduce the “growth” element to tackling the crisis.
Chief Global Strategist