Following a week in which risk aversion increased further and equity markets fell sharply the start of this week looks a little steadier. Reports in the Italian press that the International Monetary Fund (IMF) is readying a EUR 600 billion loan for Italy in the event of a worsening in the debt crisis may help to support markets as the week kicks off.
Moreover a report in the German press that German Chancellor Merkel and French President Sarkozy are preparing a fast track “Stability Pact” for euro countries similar to the Schengen agreement, that may be announced this week, will also help to steady market nerves. However, neither report has been confirmed suggesting that as usual the scope for disappointment is high. The sell on risk on rallies environment is likely to persist for a while longer despite such reports.
Liquidity is likely to thin further this week and scope for volatility is high given that there are plenty of events and data on tap. Included among these are debt auctions in Belgium and Italy today and France and Spain later in the week against the background where Germany’s failed bond auction last week has fuelled even more nervousness in bond markets. A European Finance Ministers meeting beginning tomorrow will also come under scrutiny, especially given the lack of progress so far on many issues including the issue of Eurobonds.
The key data of the week will arrive from the US, with the November jobs report, ISM manufacturing survey, Beige Book and consumer confidence reports scheduled for release. Following what appears to be strong Thanksgiving holiday weekend spending the US data will continue to show improvement although this may not be enough to stem speculation that the Fed is verging on buying of mortgage backed securities in a third round of quantitative easing.
Risk currencies have commenced the week in strong firm, with the EUR and AUD rallying. Any gain in the EUR will prove limited and unsustainable unless the weekend press reports are confirmed. EUR/USD will find upside resistance around the 1.3412 level, while the risk of a downside test of support around its October 4 low at 1.3146 remains high over coming days.