European stocks set the scene for a full blown risk rally overnight, but U.S markets failed to display the same vigor seen across the Atlantic with an earlier bout of strength losing momentum over the course of trade. There’s a sense that a bailout request from Spain is imminent given the release of last weeks budget reforms and bank stress test results. Both of which are considered critical housekeeping before Spain can formally request financial aid, in-turn key requirement to unlock the ECB’s bond market intervention program. Its abundantly clear Spain’s path of least resistance will be to make a formal request for aid in the coming days. Should Spain show further reluctance it will no doubt see Spanish debt markets punished, ultimately leading to the same conclusion. Another potential theme which could hurry the proceedings is a Moody’s review which is tipped to see the ratings firm downgrade Spain to Junk status. EU Economic and Monetary Affairs Commissioner said overnight “The European Commission stands ready to act in case there is a request.” We have the necessary instruments at our disposal in case there would be a request from any member state of the euro area.”
US markets found solace in positive data earlier in the session with the ISM manufacturing gauge jumping back into positive territory, rising to 51.5 in September from a previous 49.6. Consensus estimates showed a slight rise to 49.7 was expected. Markets rallied on the back of the solid ISM print which is seen as a particular good pre-cursor to Friday’s official jobs report, while it also suggests the recent manufacturing slump may simply be a cyclical trough rather than a structural downturn.
After falling through the downside of the 200 Day moving average yesterday, the Euro was able to muster some strength rising to highs of 1.2940. Nevertheless, greenback demand began to resurface alongside falling U.S equity markets which prompted a move lower across risk currencies. True to form, the Aussie dollar came under further selling pressure in the ensuing period of yesterday’s Chinese manufacturing data but was able to reclaim lost ground in early Europe. A brief break to the upside of 104 US cents was short-lived as moderate selling pressure took hold alongside US equity markets.
Yesterday’s official release showed China’s manufacturing sector continued to contract in September with the index rising to 49.8 from 49.2 in August. Economists had anticipated the index to edge up to 50.1. A below ‘50’ indicates contraction.
The day ahead will see the RBA policy meeting take centre stage at 1430 AEST. Although economists widely expect the cash rate to remain on hold at 3.5 percent, money markets are telling us there is a good chance of a rate cut is on today’s agenda. Given the general tendency for currencies to overstate or price-in the extreme case scenario, should Stevens and Co hold a steady course and maintain a neutral tone we can expect a sharp short-term reversal from the Aussie dollar. At the time of writing the Australian dollar is buying 103.55 US cents.