Politicians are taking it to the wire in terms of negotiating a budget deal to allow the debt ceiling to be raised. With the deadline now just eight days away, the outline of a deal really needs to be agreed today for it to stand a realistic chance of being passed into law by the 2nd August deadline. Republicans remain adamant that no package can be contemplated that includes tax increases, but party leaders in both legislatures remain confident that a bipartisan solution can be found.
However, something is going to have to give for this to happen and there are no signs of this happening yet. US bond yields are some 3bp higher in Asia trade, the 10-yr just below 3.00% with stocks around 1% softer. The dollar is only marginally weaker on the main dollar index, but the Swiss franc has surged over 1% since the New York close. So far, the markets are still betting on a deal being pulled together but it may be that politicians need a kick from the markets to realise the urgency of the situation. That’s very close to happening if no deal is reached today.
Guest post by FXPro
Commentary
New highs for gold in Asia trade. Whilst the dollar and bond markets are holding on fairly well given the lack of a US debt deal, gold continues to move higher, with another lifetime high seen during Asia trade. The other interesting point to note is that physical gold holdings in global ETFs also it a new high towards the end of last week. This sits in contrast to the previous lifetime highs in gold of early May, when ETF holdings were some way short of the highs seen at the end of last year. This suggests investors are seeing durability in the current rally.
FX nonplussed whilst credit holds a party. There a huge contrast between what we’ve seen in the FX markets today, compared to the bond and credit markets. Most of the FX reaction yesterday was based on the presumption that eurozone leaders were converging around a deal, which was viewed as better than no deal at all. In contrast, for bond markets and CDS, the devil has been more in the detail. Greek CDS have been nearly 400bp tighter in midday quotes, with Portugal narrowing by 160bp. Italy and Spain were also joining in, although in a more modest fashion. This largely reflects the reduction in risk premiums, together with the return of liquidity to both bond and CDS markets. Markets have converged around our initial assessment namely that, whilst welcome, in sum this deal was insufficient to prompt the view that the worst was over. Certainly, overall, the package will only reduce Greek debt to where it was barely a year ago (in nominal terms). Furthermore, there remain considerable uncertainties in the private sector as to the extent of the take-up of the bond swaps and exchanges on offer. But there’s also a sense of relief being felt in equities and modestly so in some of the high-beta currencies such as the Aussie. Of course, it’s not just about the eurozone, with the US debt talks still hanging over markets also serving to temper the atmosphere of the party.
German business confidence falls further. The Ifo index is seen as the primary barometer of business sentiment in Germany and there was little surprise to see it fall once gain in July. The headline balance declined from 114.5 to 112.9, with both the current assessment and expectation balances falling. There is still a fairly wide gap between the expectation balance and current conditions, which creates the risk of a greater decline in the current assessment in the coming months. This comes on the back of the decline in the preliminary PMI data seen yesterday, suggesting that the eurozone is seeing more than just a temporary soft patch in activity. Today is all about Greece though and the degree to which the deal that is on the table serves to shore up confidence in the wider euro area. Germany slowing is, in some ways, a good thing as it reduces somewhat the massive gap between the economic performance of Germany and most of the rest of the euro area. Nevertheless, it remains a difficult backdrop against which the ECB can massage expectations for a further rate increase in coming months given that, since the first move in April, the activity data has softened and the survey data suggest that this soft patch is likely to be sustained.
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