Equity Markets Heavy as Safe Haven Assets Gain; German Chancellor Dismisses Eurobond Creation

By 22 Aug 2011 0 comments

Asset markets continue to trade with a heavy tone as risk aversion continued into the close on Friday.  The Japanese Yen rose to record highs against the Dollar along with gold which rose to $1879 per ounce (a gain of more than $100 for the week).  The EUR/USD trades between 1.4260-1.4450 in a broader range with the USD/JPY staying near the long term lows at 75.90-76.70.  Equity markets are seeing very few bounces, with the S & P 500 dropping -1.5% on the day.

Market focus is now being directed toward Federal Reserve Chairman Ben Bernanke and many think he will signal additional injections of monetary stimulus at his Jackson Hole conference later this week (Friday).  Analysts are divided over this possibility but what should be remembered is that if this signal is not sent, equities will trade lower on a general drag on sentiment.  Macro data releases on Monday are few and intervention rhetoric could be a guiding factor for markets in determining directional bias.

The German Chancellor (Merkel) and Finance Minister (Schaeuble) released statements dismissing the implementation of Eurobonds this weekend. Schaeuble said that the region is not integrated for this to be a practical solution to the Eurozone debt problem because different bond yields are appropriate for each EU nation.  Merkel said that Eurobonds will exacerbate the current debt problems and undermine regional stability and this was echoed by the French Prime Minister (Fillon) as well.  He added that the introduction of Eurobonds could put France’s AAA debt rating in jeopardy.

In Canada, the BoC Governor (Carney) released a dovish statement, saying that the country is now facing “external headwinds” that were not present previously, adding that the Q2 GDP growth in the Canadian economy could be a negative reading.  His argument for this came in part from the fact that the Canadian Dollar has remained at historical highs for a long time and that this is dragging on the country’s export companies.  He did not completely rule out the possibility of further rate hikes even if the same actions do not occur in the US.

In England, a BoE MPC member (Weale) revised his UK growth projections lower, but said that another round of quantitative easing is not necessary at the moment.  Weale is one of the more hawkish members of the BoE (and had been voting for rate hikes for most of this year) but his bias has now shifted to a neutral stance.  The cumulative deficit in the UK (for the four months to July) was 40 billion British Pounds, whereas 43 billion Pounds was seen at this time last year.  These figures are better than market expectations and have lent to the argument that the need for additional QE is not immediate.

Technicals:

The FTSE has dropped back below the 5000 level and is seen in a tightening range just ahead of key support at 4930.  A break here is not encouraging and targets the monthly lows at 4770.  Resistance has moved down to 5100 and only a break of this area will take the pressure off of the downside in the near term.

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