Forex Market Outlook 11/7/11
Goodbye Greece, hello Italy! That's pretty much what the markets are saying right now as Greece is in the rearview mirror and now Italy is to the forefront. Over the weekend, Greece PM Papandreou agreed to form a coalition government and to step down from that government when it is formed. In Italy, PM Berlusconi is trying to see whether or not he can hang on to power but it is beginning to look doubtful.
Tomorrow, Italy faces a major vote on its budget and both allies and opponents of Berlusconi are calling for him to step down. His own hubris may get in the way of this being anything but a three-ring circus, but the most important thing to note is that bond yields are rising in Italy as the market is not convinced that they can do enough in the current political environment to slash budgets in order to continue receiving ECB support. Even though he survived a confidence vote a few weeks ago, Berlusconi's days appear to be numbered.
This is seen as a positive by the markets that feel that Berlusconi has been an impediment to economic health so his departure is preferred. Perhaps then he will be able to release his album of love songs. Seriously. In Greece, the situation may be less eventful but nevertheless risk remains. If a new coalition government is formed, they had better be prepared to institute the terms of the bailout agreement. At times it seemed like Papandreou was the only sensible one there and when he leaves there could be problems.
So the short and long of it is that the euro debt crisis is still very active like a volcano, with the potential to erupt at any time. As contagion starts to affect the larger economies like Italy and Spain, the dominoes could fall very quickly.
On the economic data front, Euro zone retail sales figures came in worse than expected and German Industrial production figures also came in worse than expected, showing signs that Draghi's "mild recession" call may be spot on. Thursday's Euro zone CPI report and EC economic growth forecast will highlight the news out of the Euro zone, as will the unfolding drama of Berlusconi trying to hold on to power.
Also, CPI data in Switzerland showed a decline in prices which could be the harbinger of deflationary forces starting to materialize. The unemployment rate remained at 3% as expected, and the Swiss franc is weakening as the SNB contemplates a pre-emptive battle against deflation. Switzerland has been relatively quiet of late after the peg against the Euro was enacted.
There is more data out from the UK this week, highlighted by Wednesday's GDP estimate and Thursday's BOE rate policy decision which is expected to produce no change. The Pound has been strengthening as money has been leaving the EU in favor of the UK.
There is also a slew of economic data coming out of China on Wednesday and Thursday which could affect both the Aussie and Kiwi as both of those economies are dependant upon Chinese growth. Australia has employment figures due out on Thursday as well.
In the US, there are no significant data releases to speak of so usually the Fed takes this opportunity to hit the rubber chicken circuit and discuss various economic topics. At the end of the day this will likely amount to nothing but you never know when someone will slip up and say the wrong thing. "Fedspeak" is generally intended to goose markets higher.
Meanwhile commodities, particularly gold, have been trading like safe-haven currencies and have decoupled a bit from the risk trade as they seem like more attractive places to store wealth. Stocks are mixed to start the morning, but I could see risk appetite emerging at some point today.
So there is a lot going on this week, but not much of anything if that makes sense. Berlusconi's fate will be watched closely by the markets and the quicker he leaves, the better. Italian politics though is a messy arena so expect the markets to remain on edge until clarity emerges.
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