Investors continue to look to the Euro-region for direction overnight with global markets responding favorably to Spain’s budget cuts amid speculation China may soon take further steps to stimulate the economy. We’ve seen a return of the risk trade with the Kiwi leading the charge higher despite against the greenback with the Aussie dollar also finding some form after a mostly negative week. In what many see as a precursor to an eventual bailout, Spain announced a series of economic reforms designed to cut spending rather than heavily targeting revenue. Cuts to spending will equate to 0.77 percent of GDP, while revenue based cuts will account for a smaller 0.56 percent.
Market participants are looking at the reforms in the context of the ECB’s bond-buying plans, which can only be of direct benefit to Spain should they formally seek a sovereign bailout while meeting “strict and effective conditionality in line with the established guidelines.” While we may have seen markets respond positively, it’s clear any short-term positivity is tentative at best as investors wait for the result of Friday’s Banking stress test to ascertain the condition of Spain’s banking sector. With a quarter of the population unemployed, the governments ‘means to an end’ reforms won’t be viewed as such by the people, with further austerity threatening to pull many below the poverty line.
Earlier in the UK, sterling strengthened after a better than expected GDP release which fell 0.4 percent in the second-quarter, a slightly better revision from previous estimates of a 0.5 percent fall. In yearly terms, the UK economy contracted 0.5 percent.
Across the Atlantic, investors found solace in Spain’s reforms which offset a round of mostly negative data while conjecture surrounding near-term Chinese stimulus underpinned gains. Durable goods orders fell 13.2 percent in August down from a previous rise of 3.3 percent and in excess of the expected fall of 5 percent. US GDP was revised lower from 1.7 to 1.3 percent growth in the second-quarter, to represent growth of 1.6 percent in yearly terms. A drop in the weekly jobless claims was a concession to the negative round of data with claims rising by 359,000 in the week ending Sept 22, outpacing estimates of 375,000.
The greenback fell against major counterparts with risk trends favoring risk currencies such as the Aussie and Kiwi, while the Euro once again broke the upside of 1.29-figure. After falling to lows 103.27 earlier this week, the AUDUSD pair strengthened on speculative flows after yesterdays disappointing industrial production data added weight to reports China may soon unveil stimulus measures designed to prop up equities markets. Local data in focus today includes private sector credit for August, while further conjecture over the likelihood of near-term stimulus from China will remain a key directive with the HSBC manufacturing PMI scheduled for release this afternoon. At the time of writing the Australian dollar is buying 104.45 US cents.