Spanish PM Rajoy has talked down speculation about his country taking a bailout, despite the little choice he has, after recent credit rating downgrades and upcoming ones. So, markets haven’t priced in a bailout, says David Song of DailyFX.
In the interview below, Song also discusses the US elections, prospects for Australia and other topics.
David Song studied macroeconomic policies under a visiting scholar at the Federal Reserve Bank of St. Louis while attending the Zicklin School of Business at Baruch College, and graduated with a Bachelor of Business Administration degree majoring in finance. During his undergraduate program, David acquired a strong understanding of technical analysis from a former-president of the Market Technicians Association, and incorporates both fundamentals and technicals in his analysis. After starting at DailyFX, David authors the daily briefings for the U.S. Open as well as the Trading the News report.
1. Is a Spanish bailout already priced in in the euro? How will a potential announcement impact the common currency?
It appears as though a Spanish bailout has yet to be fully priced in as Prime Minister Mariano Rajoy talks down speculation for external assistance, but the government may have little choice but to seek aid as the commercial bank stress test revealed a capital deficit of EUR 59.3B. As Standard and Poor’s cuts Spain’s credit rating to one notch above junk (BBB-), there’s growing speculation that the region will tap the EUR 100B bailout sooner rather than later and the heightening threat for contagion is likely to dampen the appeal of the euro as the governments operating under the monetary union struggle to get their house in order. Indeed, a formal request from Spain would instill a bearish forecast for the single currency and the euro remains poised to face additional headwinds over the near-term as the debt crisis continues to drag on the real economy.
2. As we draw near to the US elections, opinion polls are closely watched. Do they have an impact on the value of the dollar?
With the U.S. elections quickly approaching, there’s mixed speculation on how the outcome will impact the financial markets, but the opinion poll may have a limited impact on the dollar as it appears to be a fairly tight race. In turn, we may see a greater reaction once the results are announced, but the Fed’s policy outlook is likely to play a more important role for the dollar as the central bank keeps the door open to expand its balance sheet further.
3. The NFP report included a drop in the unemployment rate with a rise in the participation rate – positive news, but a big gain in temporary jobs. How do you see the report? Is the glass half full or half empty?
The September Non-Farm Payrolls report instilled an improved outlook for the world’s largest economy as the 114K rise in employment was accompanied by an expansion in the participation rate. The ongoing improvement in the labor market should limit the Fed’s scope to implement additional monetary support, but central bank doves may continue to push for more easing in an effort to encourage a stronger recovery.
4. The RBA surprised some observers with a rate cut. Are more cuts coming? Will Australia’s strong fundamentals and perfect credit rate win over the dark clouds from China?
After surprising with a 25bp rate cut, the Reserve Bank of Australia sounded increasingly dovish amid the slowing recovery in the $1T economy, and we anticipate the central bank to lower the benchmark interest rate further in an effort to combat the growing threat for a ‘hard landing’ in China – Australia’s largest trading partner. As Governor Glenn Stevens scales back the duration and the potential peak of the resource boom, we should see the RBA show a greater willingness to lower borrowing costs further, and the central bank may look to carry its easing cycle into the following year in an effort to combat the ongoing slack in private sector activity.
5. While the conflict about the islands isn’t so much in the news anymore, some Japanese firms reduced production due to lower demand. Do you think this issue can make a significant impact on Japan’s trade balance or on global growth?
The recent reduction in Japanese outputs is likely to heighten the trade deficit, and the slowing recovery may dampen the outlook for global growth as the region continues to face a risk for deflation. As the Bank of Japan struggles to achieve the 1% target for inflation, we should see the central bank continue to embark on its easing cycle, but Governor Masaaki Shirakawa may come under increased pressure to intervene in the FX market as the persistent strength in the local currency drags on the real economy.