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For all the volatility and trauma, it’s remarkable how little most things moved overall last week.   The S&P was down less than 2%, despite the 8% price range. In FX, EUR/CHF was more than 9% lower on the week at one point, but for the week as a whole ended up around 0.7%. Perhaps the main exception was some of the peripheral debt markets in the eurozone, with yields on Italian debt nearly 75bp lower on the week and Spanish bonds down by nearly the same amount.

The ECB’s decision to start buying Italian debt had a significant impact and has bought some time for politicians to piece together a route-map for the way ahead. The potentially positive step over the weekend was a report that the German government may not longer be against the issuance of eurozone bonds, according to the Welt am Sonntag newspaper.   If true (the FT reports that the German finance minister remains firm in his opposition), it could be a significant moment, given that, in terms of keeping the eurozone together long-term, some degree of fiscal union (and the partial political integration it would require) is the only viable way ahead from here.

Guest post by FxPro


Yen and franc starting the week nervous.   Comments from Japanese Finance Minister Noda have started the yen off on a weaker footing, as he underlined that he’s ready to intervene again “if it becomes necessary”. Furthermore, weekend press reports in Switzerland suggest that there have been intense talks between the central bank and government on the possibility of setting a target for the franc, this rumour having pushed the Swiss franc down 2% since the New York close. Speculation on this front increased last week after comments from Deputy Governor Jordan suggesting it as one of the policy options. The central bank knows that actual intervention could do more damage to its balance sheet (already a CHF 30bln loss over the past 18 months), hence the focus on injecting large amounts of Swiss franc liquidity into the market as a means of weakening the franc. With regards to a peg to the euro, the reasons for doing so are apparent; the Swiss economy is by far the most open of the major currencies. The usual way to measure this is to average the sum of exports and imports and divide this by GDP. The US is a relatively closed economy at 0.14, the UK more open at 0.29 and Switzerland is 0.60. Furthermore, around half of Swiss exports go the eurozone, so the EUR/CHF exchange rate is by far the most important for monetary policy.   But whether a peg to the euro would be possible to implement is an entirely different matter. In the past three and a half months, EUR/CHF has traded a bigger range than was the case for the first eight years of monetary union. So in other words, a peg would have worked in the pre-credit crisis era, but would have failed miserably in the price action that we’ve seen since. Furthermore, if CHF is as over-valued as the Swiss authorities currently believe, then this would have to be rectified somehow before a peg could be instigated. The final issue is that, with sovereign risk factors being such a big force acting on currencies, it’s difficult to see how the Swiss could stand side by side with the euro in the coming years.


ECB funding and bond-buying.   There was a big jump in the amount of money borrowed overnight from the ECB on Wednesday (figures reported Thursday), up to levels last seen in late February.   The move back down to normal on the Thursday served to quell some of the fears that this borrowing was down to problems in French banks. A factor of note for Friday was the further talk of bond-buying from the ECB from peripheral debt markets. The ECB will release date on those purchase – settled up to Wednesday of last week later – today, which will provide the first official take on the amount of bonds bought since the ECB re-opened its SMP buying program on the day of the last Council meeting.   Nevertheless, there remains talk of banks pulling credit lines from other banks, both in the non-secured, but also in the repo market, where lending is backed by collateral.


US spending keeping head above water.  The July retail sales data was taken well, given that it met expectations after a week that has seen exceptional volatility in markets. Headline sales were up 0.5%, with the June number revised up to 0.2%, from the previous flat reading.  Consumers have put in a pretty poor showing so far this year, but this pace of growth is still insufficient to make up for the weaknesses in the US economy.