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Key events for this week: Fiscal and structural reform package in Greece, US presidential elections, ECB and BoE

Key events for this week: Fiscal and structural reform package in Greece, US presidential elections, ECB and BoE

5.11.2012 9:51

This week, all eyes will be on Greece. On Wednesday, the parliament will vote on a fiscal and structural reform package, designed to save €13.5B. Next weekend, they vote on the 2013 budget. Democratic Left, the smallest coalition-party, dropped its support as it disagrees with some labour reforms. There are also some dissidents from the PASOK party, which leaves PM Samaras’ government with a very slim majority. Both votes should thus get a green light, paving the way for the disbursement of the next €31.5B aid tranche. However, these votes won’t mark the end of the Greek debate. Focus will rapidly shift on whether Europe can bridge the financing gap, created by a two year-extension of the Greek programme. Ahead of the votes, all sorts of rumours and headlines can spark volatility on EMU bond markets. As mentioned above, we think the bills will pass in parliament and that the tougher issue will be agreeing on how to bridge the financing gap.

In Belgium, the government didn’t reach an agreement on €3.7-4.3B austerity measures for next year’s budget. The coming week will prove to be important as time isn’t on the government’s side. Another, pending issue is Dexia. Belgium and France will continue bilateral talks on the (distribution keys of the) capital increase and the extension on state guarantees. For now, these issues had no impact on Belgian bonds. Any negative developments might can add some pressure.

Today, the eco calendar is thin with only the US non-manufacturing ISM on the agenda and the services PMI in the UK. G20 Finance Ministers and Central bankers continue their two-day meeting in Mexico.

Last month, the US non-manufacturing ISM showed remarkable strength, rising for a third consecutive month. The headline index jumped from 53.7 to 55.1, while the consensus was looking for a slight worsening in sentiment (to 53.4). For October however, the consensus is looking for a small decline in the index, from 55.1 to 54.5. We believe however that the risks are on the upside of expectations. US economic data showed signs of improvement recently, supported by a recovery in consumer sentiment. This might also boost services sector sentiment and we believe therefore that the risks are for an upward surprise.

Looking to this week’s trading, events will take centre stage. On Tuesday, the US presidential elections and on Thursday the meetings of the BoE and the ECB. The Chinese leadership change should be concluded (8-14 November). The outcome of the US presidential race is still very much open, as the latest polls show it is a neck-and-neck race. Also the elections for Congress are of paramount interest. Will the Republicans break the current democratic majority in the Senate? Apparently this is less likely than was thought some time ago. How will their majority in the House fare? Once all the results are known, markets may start drawing conclusions for policy in the next few years, but shorter-term uncertainties about the fiscal cliff will remain whatever the outcome. So, most likely the initial market reaction might be purely an instinctive one. A Republican positive outcome may favour equities, while a democratic one could be more bonds friendly. We see though little reasons to expect a strong directional multi-day rally of either asset class, as shorter-term considerations , the fiscal cliff, will keep investors cautious. The BoE won’t extent its QE bond buying. It will pause, but should be ready to resume buying if the economy weakens again or if another financial crisis strikes. The ECB is expected to keep its policy unchanged (A flash report is under preparation). Economic and monetary developments warrant additional policy action, but the ECB doesn’t want to distract attention from its operational, but still unused OMT. In the ECB press conference, attention will focus on Spain that is still pondering whether to ask for a ESM bailout (precautionary package) and first wants to know from the ECB what it may expect from the OMT (in yield terms) before requesting aid. We don’t expect the ECB to give in to such demand that would hurt the ECB’s credibility. Greece is another main event, as discussed above.

The US eco calendar doesn’t contain key releases, even if the Nonmanufacturing ISM (today, see higher) and the Michigan consumer sentiment survey (Friday) are interesting. Also the euro eco calendar is thin, with only the German industrial orders & production (Tuesday/Wednesday) and the French & Italian production figures (Friday) worth looking at. The EU Commission presents on Wednesday its Autumn economic forecasts.

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