Following US elections the reality of the task ahead to resolve the looming fiscal cliff has cast a long shadow of markets, leaving risk assets under pressure. Despite comments from the US administration and Congressional leaders of a willingness to compromise, markets remain unconvinced, especially given the unchanged underling stance of both Democrats and Republicans, the former towards taxing the wealthiest and the latter towards no tax hikes.
US data and events will not help risk appetite, with a drop in retail sales, moderate gains in manufacturing surveys and a small gain in October industrial production expected. The main highlight will be the FOMC minutes. Perversely the USD will continue to benefit even though much of the rise in risk aversion and subsequent safe haven demand is US orientated.
News that Greece passed its 2013 budget over the weekend will do little to assuage concerns over the country’s precarious financing position. It will also not guarantee that the Eurogroup meeting will approve Greece’s next loan tranche today given disagreements over the country’s debt sustainability, with a decision only likely by the end of the month.
Greece’s ability to handle a EUR 5 billion debt repayment this week via a treasury bill auction tomorrow will be the immediate focal point for markets given the difficulty for the country to obtain financing. At least economic data in the Eurozone will be slightly less negative, with upside risks to preliminary Q3 GDP and a likely third straight gain in the German ZEW investor confidence index expected in October. None of this will offer much respite for the EUR which looks set to slip further on its way towards its 100 day moving average around 1.2639.
In Japan the release of Q3 GDP data this morning which revealed the first negative reading in 3 quarters and broad based weakness in GDP components adds to the pressure on Japanese officials, in particular the Bank of Japan to intensify its stimulus efforts. The likelihood of another negative reading in Q4 and therefore a technical recession also highlights the need to weaken the JPY in such efforts. However, as we have been warning the move in USD/JPY above the 80 level proved short lived, with the currency pair undermined by a drop in US bond yields and to a lesser extent higher risk aversion. We see little chance of USD/JPY sustaining a break back above 80 in the current environment.