September 7 2012

In the broadcast today: All Eyes on the Fed and the USD Next Week! Following this morning’s disappointing U.S. employment report, we examine how the weak U.S. job creation could influence the Fed’s monetary policy decision next week and explore its potential impact on the USD, we list the Top 10 spotlight economic events that will move the markets in the week ahead, we examine the consensus forecasts for the upcoming economic data, we analyze the bullish breakout in the EUR/USD currency pair, we follow up on the anticipated breakout in the GBP/USD pair, we note the renewed USD weakness against the JPY, we highlight the market’s reaction to the U.K. and the German Industrial Production, the Canadian Employment Report, and the U.S. Non-Farm Payrolls, we discuss new forecasts from Bank of New York-Mellon and Wells Fargo, and prepare for the trading week ahead.

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Global stock markets and euro rise after ECB president Mario Draghi’s ambitious plan to keep the eurozone together. U.S. unemployment rate declines but job creation disappoints, raising the odds of additional easing by the Fed…

Powered by article titled “Draghi’s eurozone rescue plan continues to boost shares and euro” was written by Julia Kollewe and Graeme Wearden, for The Guardian on Friday 7th September 2012 17.22 UTC

European Central Bank president Mario Draghi’s rescue plan for the eurozone brought cheer to financial markets for a second day, while pressure built on Portugal, which was expected to announce further austerity measures.

The Italian stock market added 2.1%, while the Dax closed up 0.7% and Spain’s Ibex, France’s CAC and the FTSE 100 in London all finished the day 0.3% higher after “Super Mario’s” ambitious plan announced on Thursday to keep the eurozone together by sanctioning “unlimited” bond buying by the ECB.

Asian markets also staged a strong rally, with Japan’s Nikkei index posting its biggest gain in five months, of 2.2%.

The euro rose against the dollar, climbing near the $1.28 level for the first time in three months.

Spanish and Italian borrowing costs declined sharply, with the yield, or effective interest rate, on Spanish 10-year debt dropping 0.4 percentage points to 5.6% – the first time it has been below 6% since May. Six weeks ago it had surged to 7.6%, deep in the danger zone where borrowing costs become unsustainable, and at the start of this week it was still around 7%. The Italian equivalent fell a quarter of a point to 5% – in late July before Draghi’s commitment to “do whatever it takes” to preserve the euro it was at 6.75%. The cost of insuring Spanish debt also tumbled.

The 10-year Portuguese yield was down 0.4 points to its lowest level since March 2011. Although as high as 8.1%, that compared with 18% in February.

The Dow Jones industrial average hovered between gain and loss after the US Labour Department said the US had added just 96,000 new jobs in August, far below expectations. The Dow hit its highest level since December 2007 on Thursday, but the jobs report focused investors on the US’s own problems.

The pound got a fillip from the weak US jobs data, climbing to above $1.6 for the first time since mid-May. Surprisingly strong industrial production data also brought some cheer to Britain. Factory production in Germany was also stronger than expected, rising by 1.3% in July.

The Federal Reserve meets next week and economists speculated that the poor jobs figures will add further pressure on the central bank to act. Chairman Ben Bernanke indicated in a speech last week that he was concerned about the slowing pace of the US recovery and the still high unemployment rate.

The Portuguese prime minister, Pedro Passos Coelho, was expected to set out fresh austerity measures last night in a televised address billed as a “declaration to the country”. Measures such as a VAT rise, cuts to the public sector payroll, or new tax measures were expected.

Spain gave no hints on when it might make a formal bailout request to trigger the bond-buying programme. Deputy prime minister Soraya Sáenz de Santamaría said the plan would be discussed at next week’s meeting of European finance and economy ministers in Cyprus.

“While markets are currently happy that the ECB’s bond purchase scheme stands ready to be activated, getting the Spanish and Italian governments to agree to programmes is likely to be fraught with difficulties,” said Grant Lewis at Daiwa Capital Markets. “Indeed, the positive market reaction makes their activation less likely by taking the pressure off the Spanish and Italian governments. So, it may well require a significant deterioration in market sentiment once again to ultimately trigger the programmes that lead to ECB purchases.”

German chancellor Angela Merkel expressed support for the ECB over the creation of the bond-buying programme, and said the central bank was right to insist on conditions in return for any assistance provided through the scheme. Meanwhile, the Bundesbank, Germany’s central bank, refused to back the plan, and it did not go down well in parts of the German media. Top-selling tabloid Bild led the way, warning that the ECB’s “blank cheque” could make the euro “kaputt”.

Handelsblatt criticised “the democratic deficit of the euro rescuers” and linked the ECB’s latest action to next Wednesday’s ruling by Germany’s Constitutional Court on the legality of the eurozone’s new bailout mechanism and budget rules. This is another crunch day in the euro – a rejection of the European Stability Mechanism and the fiscal pact would plunge the eurozone into fresh turmoil. A Reuters poll of 20 top lawyers found unanimous agreement that the court will throw out the request for a temporary injunction to halt the ESM and the pact. However, 12 of those questioned also expect the court to insist that German liability has to be limited. © Guardian News & Media Limited 2010

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