After a solid start to the trading week, sentiment turned sour on Friday as investors digested a host of less-than-encouraging corporate earnings. US markets erased much of the gains seen earlier in the week after earnings from industry heavyweights Microsoft, General Electric and McDonald’s failed to meet expectations. The S&P500, considered a broad measure of investor sentiment, fell 1.66 percent to finish the week a meagre 0.32 percent in the black. The index was up as much as 2.48 percent on Thursday. The risk-off tone saw the US dollar’s safe haven credentials kick into gear, with the Canadian dollar leading a charge lower. The Australian dollar also succumbed to broad-based market negativity, but managed to finish the week near 1-percent in the black. The Euro also took a hit with a break to the downside of $US1.31 before finding support just above the $US1.30-figure.
Europe’s elite also wrapped up their two-day summit on Friday, and once again markets appeared to be left unfulfilled. Leaders have agreed, in principle, to implement the legal framework of Europe’s banking supervisor by 1 January 2013. The European Central Bank has been given the task of overseeing the Single Supervisory Mechanism (SSM) in an effort to support Europe’s debt ridden banks. Eventually, the SSM will have the capacity to work alongside Europe’s permanent bailout fund, the European Stability Mechanism (ESM) and provide conditional funding to Europe’s most vulnerable banks. Still, with only vague detail provided, it’s apparent there’s much to be debated concerning the finer points of the SSM, with markets keenly watching Germany and France for potential clues. While France is leading the charge for a speedy implementation, German Chancellor Angela Merkel has painted a far more tentative picture stating “There are complicated questions to clarify and we’ll see in December if we complete it or not, “for now, the political will is there.”
European leaders haven’t had the best record for expediting such initiatives, and markets are clearly expecting another elongated series of talks, meetings and summits before any finer detail comes to light. The agreement will also need to be passed through the European Council and Parliament to allow for the implementation by 1 January.
Hopes of a Spanish bailout may also be wearing thin with Spanish Prime Minister Mario Rajoy maintaining a casual demeanour despite high investor expectations. Rajoy said on Friday “I’m not going to take into account any pressure that people might exert on me, but frankly no one is doing that,” I don’t see any European Union leader telling me I should use the mechanism the ECB has put in place. Nevertheless, expectations that Spain will be the next to join the list of bailout casualties has seen significant improvements across Spanish debt markets, with 10-year yields at their lowest level in 6-months.
The local week ahead will see the release of third-quarter CPI dominate an otherwise quiet week on the data front. China will also remain a key directive for the local unit with the HSBC flash Manufacturing PMI to be released on Wednesday. Alongside a slew of corporate earnings releases, the US week will see data on the health of manufacturing and housing remain in the spotlight, with Wednesday Fed’s policy meeting and Friday’s GDP the headline events. Across the Atlantic, European corporate earnings may also make their mark on sentiment this week with Electrolux, Volkswagen and Credit Suisse some of big names on the docket. Alongside the usual conjecture surrounding the fortunes of Greece and Spain, data from the region this week includes German and Euro-Zone PMI for both services and manufacturing and the German IFO data series – all scheduled for release on Wednesday.