The Week Ahead

15 October 2012

The leaders of the European Union are under immense pressure as the time draws closer to the summit later this week. The Euro, which registered gains last week, is all set to quickly go bearish as the gap widens between the long speeches of the EU leaders and the stark reality. The credit degradation by Standard and Poor’s 500 last week has made things very difficult for Spain, which is already on a very rocky terrain. Chances for a bailout request from Spain are highly likely anytime now.

The Euro however might witness a rally as the EU leaders begin the summit but the question is will the economy sustain under the weight of a severe recession or will it crumble like a cookie under the impassive policies of the EU?

The two-day summit

The European Union has decided to hold a summit later this week, on Thursday and Friday at Brussels addressing a number of issues that are plaguing Europe at present. The pressure on Madrid for an early bailout is immense and it is likely to be the centre of focus during the summit. Athens, which is already living on a bailout, would be looking forward to a deal with troika to enable its next instalment of loan tranche. Some of the other agendas include a common budget for the European Union and some proposals for the banking union.

Another important aspect that needs to be addressed is breaking the link between banking and sovereign debts. Earlier this June, the EU was in unison to recapitalize the banking sector through the European Stability Mechanism (ESM). This would ensure that supporting the banking sector would not affect a country’s credit ratings. All the EU countries including the ‘eurosceptics’ also agreed to sign the deal. But the ‘eurosceptics’ were quick in saying that the legacy debt was the responsibility of the borrowing nations. A decision regarding this will reflect deeply on Spain and also the Euro zone economy.

You may want to open your call options as the two-day summit begins. The Euro is likely to go bullish at least for a while during the summit.

Spanish bond auctions

Madrid’s worst fear is that they might be rejected when they make a plea for a bailout. This would cause a lot of humiliation to the Spanish administration and also trigger a brand new blitz of market pressure. There is also another looming fear about Germany blocking any attempts to the Spanish aid and imposing stringent norms before Spain can obtain any funds. Chances are that Spain will hold back for some time before pleading for the bailout.

Thursday’s Spanish bond auction is likely to draw the attention of many investors as the markets worldwide are getting extremely impatient with Spain’s delaying tactics. The impact however is likely to be a little subdued in view of the Summit which is bound to grab all the attention.

Also the German ZEW survey, which is due tomorrow, might just cause some stir in the markets, despite the fact that the data might be credibly obscured by political considerations.

The Spanish Bond auctions and the German ZEW both are the key events this week. You might just be tempted to open your call options but it would do you good to stay away from these two as they might move the markets either way. However, if Spain pleads for an early bailout, the markets are likely to be delighted and it would be the most opportune time to open up your call options.

Asia, U.S. and the U.K.

There is some important Chinese data due to be released this week. The latest consumer inflation will be made public today and a quarterly GDP data later this Thursday. If the data does not meet market expectations and comes below forecast, the situation is likely to cause great fears about the country’s future economic accomplishments.

The U.S. sales report is also due today. This week will also see the Philadelphia Fed index and the New York manufacturing PMI released later on Thursday. These surveys saw some weak readings in September. However, this did not explicate into any downturn for the national PMI reading. The impact from the surveys this week is likely to be slightly damped as the investors are already viewing the data with much scepticism.

In the U.K. the latest consumer inflation data will be released tomorrow. The inflation rate, which fell steeply earlier this year, has flattened out now. The report is likely to have an impact on the Bank of England and Sterling. The unemployment report is also due to be released later this Wednesday along with the latest MPC minutes. A rise in the unemployment aid count would have a negative impact on the Sterling. Also, there is uneasiness in the markets owing to the stickiness of inflation; any rise in the rate of inflation is a cause for severe concern.

The government borrowing data and the retail sales data are also going to be released later this week on 19th October and 18th October respectively.

The Asian market might receive a boost if the Chinese consumer inflation data meets or exceeds market expectations. It would be a good time to open your call options if the events turn out favourably.