Spain in a Quandry

Protests over austerity measures in Spain continued to gather momentum, triggering a spike in borrowing costs. As Spain’s Prime Minister, Mariano Rajoy, prepares to unleash his new austerity initiatives, he is evidently caught between the devil and deep blue sea following recent protests. Today’s event in Spain will be regarded as the nation’s plan to return to the path of fiscal consolidation. Developments in the Eurozone and releases from the US will be the trend setters today. Data today revealed that UK’s GDP contraction for the second quarter was not as deep as earlier envisaged. Moreover, the CBI’s upbeat retail sales data reaffirmed the widely held belief that the British economy is steadily emerging out of the recession.

Pound Sterling – UK Markets

Sterling reversed its recent losses and hovered near the 1.62 mark against the US Dollar, as data just released revealed an upward revision in the UK’s GDP figures for the second quarter, confirming the belief that the contraction for the second quarter was overstated by the ONS. Meanwhile, the latest releases indicate that the British economy continues to gain traction in the final phase of the third quarter. Data from the CBI revealed that retail sales for September climbed modestly, reflecting the resilience shown by the sector to the recession in the UK. The BoE’s credit conditions survey revealed that mortgage lending shows 'significant' improvement, reaffirming upbeat mortgage lending data from BBA earlier in the week. Apart from key economic releases scheduled for release from the US in the latter half of the trading session, markets are also expected to focus on GfK’s consumer confidence data for more cues about the state of the UK’s retail sector.

US Dollar – US Markets

Worries surrounding the Chinese economy abated, amid hopes that China would come up with key measures to stimulate growth after today’s data revealed that the nation’s industrial profits fell for a fifth consecutive month. Hopes of a fresh round of easing in China weakened the US Dollar in today’s session. Yesterday’s session witnessed the greenback posting modest gains against its peers on the back of rising Spanish borrowing costs. Meanwhile, economic releases during today’s session hold significance for gauging the direction for the greenback. Any negative surprise from the final estimate of the second quarter GDP data holds the potential to change the trend in the currency markets. Meanwhile, today’s jobless claims figures is expected to set stage for next week’s non-farm payroll figures. Meanwhile, durable goods orders will also be watched closely, given the slump in manufacturing activity last month. Apart from major releases from the US, markets are also expected to keep a close eye on developments in Spain as the government prepares to unveil its fresh austerity programme in today’s session.

Euro – European Markets

With Spain’s 10 year bond yield hovering above the 6% mark, today’s attention is expected to be centred on the developments in Spain for clarity over the plans that the nation would undertake in order to deal with its fiscal problems. As the Spanish Prime Minister prepares to unveil his austerity programme, the latest protests reveal the growing resentment for such measures. The Euro failed to hold on to early gains, as data revealed that the number of unemployed in Germany continued to climb for September. Meanwhile, Euro fell below the 1.29 mark in yesterday’s session, following the German, Dutch and Finnish finance ministers’ joint statement that Europe’s rescue fund should assume a limited role in bank recapitalisations. Moreover, the Bank of Spain warned that the Spanish economy continued to shrink at a "significant rate". Apart from Spain’s budget, Eurozone’s business climate indicator and Italian bond auctions are other triggers to watch for in today’s session.

Other Currencies – Highlights

The Aussie Dollar rallied against major safe haven currencies in today’s session, as market participants speculated that China would implement fresh measures to revive economic growth. Data earlier today revealed that industrial profits in China continued to fall, fueling speculation that China would act in order to counter its economic weakness. Among macro indicators, data revealed that job vacancies in Australia rose 4.2% for August, compared to a 5.4% fall recorded in the prior month. Meanwhile, markets are expected to focus on development in the Eurozone and releases from the US in order to gauge risk appetite among market participants. With no major domestic data scheduled this week, attention will fixed on Reserve Bank of Australia’s monetary policy meeting on Tuesday. Markets are also expected to monitor next week’s official PMI data from China for further clarity about the Chinese economy.