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Tuesday, March 19, 2024

Key Events In The Week Ahead

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

From Goldman Sachs

Last week’s political developments in the Eurozone showed continued gradual progress. PM Mario Monti has formed a new government of technocrats in Italy, while elections in Spain tonight are expected to run smoothly given broader political consensus for austerity and reform. Finally, despite some ongoing party strife in Greece, PM Papademos’ government revealed its 2012 budget plus a EUR3bn primary surplus for 2012. Our long EUR/$ trade was predicated on such a decline in tensions.

However, market tensions remained acute, as a credible end-game to the crisis does not seem near. As per our views, the ECB remains the key agent safeguarding against a disorderly systemic credit event on the banking side. But it has become increasingly clear that the ECB does not wish to have a more proactive role in accommodating risk transfers across nations and capping borrowing costs for key countries. Moreover, there are conflicting news reports on the steps that Eurozone governments would like to take to accommodate a fiscal solution with some reports arguing for advancements in Eurobond plans and other reports arguing for more sovereign insolvencies possibly underway. France and Germany also seem to disagree more openly about the role the ECB should play in leveraging up the EFSF.

As tensions spread in the banking system, funding pressures resurfaced as a key market characteristic. Last week, we saw significant widening in both the Eurodollar and the dollar-yen cross-currency basis and a jump in swap spreads across the board. Typical risk-averse price patterns resurfaced in the FX space, with high beta currencies selling off against the dollar as the chart below shows. This hurt our weekly FX idea of being short $/MXN, which closed on Friday 1.6% in the red.

Interestingly, the EUR bounced higher towards the end of the week for two key reasons. First, EUR short positioning became quite significant and stops were triggered during a brief recovery above 1.36. Second, repatriation flows into Eurozone remain a key theme mostly driving the weakness in peripheral currencies but also contributing partly to EUR/$ resilience. It would be interesting to see whether these repatriation flows broaden out. If so, a key indicator would be the price action in EURGBP and EURSEK, which could appreciate further next week.

Along those lines, Hungary announced last week that it is planning to enter discussions again with the IMF to offset risks stemming from outflows. Hungary had exited the previous programme prematurely, and the budget reform plans that the government had put forth were not credible enough to stabilize local fiscal dynamics, as Magda Polan has argued over time. Nevertheless, the possibility of IMF involvement helped HUF retrace some of its significant losses so far, which hurt our long RUBHUF recommendation.

The week ahead is light on data. The highlight of the week will be the publication of the PMIs in the Eurozone and the IFO in Germany. We expect business sentiment to deteriorate but only modestly. There is also the release of the first of several monthly China PMIs. Durable Goods and the FOMC minutes in the US will also be interesting to watch. Data in the US has been reasonably stable and have continued to surprise mostly on the positive side, albeit less so recently as expectations have adapted. Sub-trend growth will lead the Fed to consider its easing options again, but possibly not until sometime next year.

An important US event this week will be the deadline for the fiscal Super Committee, which will likely fail to deliver a plan to cut the budget deficit by $1.2tn over the next 10 years. Though markets do not expect a plan before the deadline, it is likely that the focus on structural US imbalances intensifies during the week. This could well become an even more risk-averse environment, leaving few options to go short the USD. As our weekly FX idea, we therefore like short $/JPY, aiming for a move back to the pre-intervention lows.

Monday 21 November

  • US Existing Home Sales (Oct): We expect a 4% mom decline in existing home sales, below consensus of -2.2%.
  • Also interesting: Taiwan export orders (Oct), Poland Industrial Output, Switzerland M3, Fed’s Lockhart speaks.

Tuesday 22 November

  • US GDP (Q3): The second print of Q3 GDP for the US will be interesting to watch. Consensus expects no change from the original print of 2.5%.
  • Also interesting: US Richmond Fed survey, Eurozone consumer confidence, Fed’s Kocherlakota speaks.

Wednesday 23 November

  • China HSBC Flash PMI (Nov): The prior reading was 51.1.
  • Eurozone PMIs (Nov): Eurozone countries will be posting flash PMIs. For the key PMIs, in Germany we expect a print of 48 for manufacturing and 49.5 for services.
  • US Durable Goods Orders (Oct): We anticipate that durable goods orders contracted by 3% mom in December. Consensus stands at -1.2%.
  • FOMC Minutes: We do not expect the Fed to change its communication policy dramatically until the end of this year.
  • US Super Committee Deadline: The committee is supposed to announce a $1.2tn deficit reduction plan by midnight. Failure to deliver a plan, which currently looks very likely, would lead to automatic budget cuts, evenly split between domestic and military spending from 2013. Rating agencies could also have another look at the US fiscal situation if the committee fails.
  • Also interesting: Turkey MPC meeting, UK MPC minutes, US Initial Claims, French INSEE business survey.

Thursday 24 November

  • German GDP (Q3): We expect a 0.5% qoq print for German GDP, in line with consensus.
  • German IFO (Nov): German business confidence is expected to decline modestly to 105 from 206.4 last month and slightly below consensus of 105.8.
  • Also interesting: UK GDP Q3 Revised, RBA Stevens speech on Economic Outlook.

Friday 25 November

  • Potentially interesting: Italy retail sales, France consumer confidence
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