Fears over fiscal policy on both sides of the Atlantic saw severe risk aversion on Monday, with the Dow Jones dropping 171 points before recovering to end the day down 95 points (0.8%). While fiscal dynamics, particularly in the eurozone, are a substantial concern, there is a chance that some relief will come on Thursday.
Recent comments from eurozone policymakers have demonstrated that compromise may be forthcoming on how to deal with the Greek debt mountain and thereby bolster confidence in other eurozone sovereigns (Italy being most critical). My colleagues and I reiterate our belief that substantial action will be needed in order to prevent the eurozone debt situation deteriorating further, but if policymakers are able to agree measures such as a Greek debt buyback on Thursday, then risk assets would receive a boost.
One such asset, copper, is already on the move. The metal has broken through resistance to trade up to US$9,786/oz and we retain our bullish medium-term view. The Dow Jones was also stronger on Tuesday, back at 12,500. However, we refrain from initiating a bullish Key Market View on copper or US equities (both of which featured in our Key Market Views in early July) until we have a clearer picture over what, if any, action eurozone policy-makers will take (no action would make bearish views appropriate).
We note, however, that if the Euro Group is able to alleviate macro concerns over eurozone debt dynamics, then supportive readings on the micro level could then take the driving seat. Yesterday saw strong earnings results (in excess of consensus expectations) from US multinationals IBM, Haliburton and Stanley Black & Decker, while of the 44 S&P 500 firms that have so far reported Q2 2011 profits, 33 have beaten analysts’ forecasts.
Furthermore, we expect that political brinksmanship in Washington will give way to agreement over raising the US debt ceiling before August 2 (almost nobody would benefit from a failure to do so). Therefore, agreement in Europe on Thursday, potentially followed by agreement in Washington, has the potential to see risk appetite make a return.
On the subject of the eurozone crisis, Arabic speakers among Risk Watchdog’s vast audience may well want to check out BMI Head of Europe Analysis Mark Schaltuper’s appearance on CNCB Arabia last night.