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Weekly CZK Report: Italy and QE3

Weekly CZK Report: Italy and QE3

18.7.2011 9:51
Autor: Tomáš Vlk, Patria Finance

Risk was sold off at the beginning of the week as markets were hit by another wave of fear about the European debt crisis. Contagion started to spread quickly to Spain and Italy and yields of their bonds surged. One of the important reasons behind is Greece, more specifically the difficulties with the long-term rescue plan. The EU finance ministers did not agree on a concrete credible plan for Greece. Later on, this issue stopped weighing so much on the markets as attention focused elsewhere. Moreover, the Italian Parliament has approved an austerity package. Although it was expected, some positive effect is possible.

Another important topic was the Fed´s policy. Chairman Bernanke delivered his semi-annual report on monetary policy to both chambers of the Congress. The first speech got the dollar under pressure against other currencies as it opened the door for further monetary easing. Also the risk appetite improved, with implications for other markets. However, next day Bernanke tempered the expectations for another stimulus, or QE3, saying that the Fed is not prepared at this point to take further action. He also pointed to the elevated inflation. This second speech supported the dollar and helped it to pare the previous losses.

Also the US has their fiscal issue as negotiations about raising the debt limit show no visible progress. Rating agencies, Moody´s and S&P, have already put the US rating on creditwatch negative, reflecting an increasing risk that the policy stalemate will last too long. In Europe, Greece and Ireland saw further downgrades of their ratings.

Macro data from China beat estimates, showing a fast growth of real economy despite monetary cooling. The US macro figures, on the other hand, brought another disappointment.

Overall, the mix of last week´s events had a negative impact on riskier assets. The dollar has gained more ground against the euro and the CE currencies have weakened.

For the koruna, also local data were negative. Both CPI and PPI came out below expectations, showing an m/m decline in prices in June. Although there was an influence of food and fuels, expectations about the CNB rates may have slightly changed. The hike at the next CNB meeting is somewhat less likely than before. Other data from the Czech economy – the unemployment rate and the current account balance – did not bring a significant surprise and were neutral for trading. 

This week no local events are on the agenda. The most important figures will be soft indicators such as the German ZEW and Ifo indices and Philadelphia Fed index. Fiscal issues on both sides of Atlantic remain major risk for the markets.

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