A sense of optimism

A sense of optimism looks to be filtering through markets at present. This derives from hopes that the European authorities will be able to ring-fence Greece and steer clear of a much deeper and wider contagion to other Eurozone peripheral countries than has already taken place. This may involve a European version of the US Troubled Asset Relief Program. A variety of other methods are being considered including covered bond purchases from the ECB, provision of 12-month liquidity by the ECB, a policy rate cut, banking sector recapitalisation and increasing the size of the EFSF bailout fund.

The consequence of such rumours have provided a slight euro rally and asset markets however there is a long way to go before hopes turn into action. The next few weeks will be essential to establish whether a firmer base to sentiment and the euro can be established and markets will turn their attention to a meeting of Eurozone finance ministers on 3 October and the European Central Bank on 6 October. Meanwhile national votes on changes to the EFSF bailout fund will continue with Germany’s vote on today. While the vote is likely to pass it may draw attention to divisions within Chancellor Merkel’s party.

Without doubt, there is no room for any more distress especially given that the plans agreed by European officials in July have yet to be implemented. If there is no solid action over coming weeks the euro will come under renewed strain and indeed the risk is still heavily skewed towards more euro weakness given the various disagreements between officials. Nonetheless, the improved mood in the short term will likely help prevent the currency from sliding further for now and a base appears to be forming just under 1.35 against the US dollar.

As for the rest of this week as mentioned above we have the German vote on the EFSF bailout today followed by US GDP figure at lunch time with an expected growth figure of 1.2%. Tomorrow we have a Canadian growth number and US Michigan Confidence figure in the US in the afternoon.