EURUSD hits 17-month low on deepening euro debt worries

00:00:00: Software, US inflation and jobs data have reduced expectations of another Fed rate hike in October supporting equities.

00:00:07: but bond markets remain under pressure this morning especially in the euro area.

00:00:12: France's widening yield spread over Germany reflects mounting fiscal and political concerns.

00:00:18: they're dragging the Euro lower against most majors this morning as investors are wondering whether this nervousness around friends will spread to.

00:00:28: So welcome to Swisscoats.

00:00:30: Daily market talk is Monday, the fifth of October.

00:00:34: I'm Ipekos Kardeshkaya.

00:00:36: we will talk about the latest US data and a deepening Euro debt crisis in today's episode.

00:00:41: but before we do as always please keep in mind that opinions are my own And this not financial advice.

00:00:56: So the week starts on quite a good mood, especially for US investors as last weeks economic data from the US gave investors reason to believe that the Fed will skip another rate hike later this month.

00:01:08: Instead of PC data from U.S.

00:01:09: suggested last week that inflation in the US heated up less than expected in August while Friday's official jobs figures printed is softer then expected and FB number AND is softer than expected and weaker wages growth compared month earlier.

00:01:26: According to that data, the U.S economy added just twenty nine thousand new non-farm jobs in the month of September.

00:01:34: last two months figures were revised lower as average wages growth unexpectedly slow to three percent on a yearly basis and unemployment rate in the u.s rose to four point two per cent mark although that was due to higher participation rate meaning it wasn't bad.

00:01:51: but a softer than expected.

00:01:52: data pulled us through your lower last Friday as investors scaled back their rate hike expectations before rebounding, however.

00:02:00: Because a closer look to Friday's data hinted that the jobs report from the US was not THAT catastrophic after all!

00:02:07: I was reading EVP Research's reaction to Jobs Data for example and they were highlighting that cyclical payrolls like construction & manufacturing are more sensitive to changes in interest rates.

00:02:23: conditions like credit and capital spending, for example provide a clearer signal of whether ecomic weakness is spreading or reversing.

00:02:35: And whether economic momentum is improving or worsening.

00:02:39: And construction and manufacturing payrolls reach a new cycle high in September they say in this report.

00:02:45: that's stronger evidence of genuine cyclical upturn regardless.

00:02:52: The Fed's October hike expectations melted away during the course of last week, before economic data markets were pricing more than twenty percent chance for a rate hike later this month.

00:03:13: Inflation remains high in the US but the latest data doesn't show alarming heating and jobs data looks somehow softer after At least looking at the headline figures, and US two-year yield is consolidating near the four point eighty percent level this Monday morning after an attempt toward a five per cent psychological mark last week.

00:03:36: The U.S ten year yield however it's pushing higher again And spread between the two is now wider.

00:03:41: It's around forty six basis points which are also comforting for broader risk assets because Investors were worried that we could see an inversion in their two to ten year portion of the u.s.

00:03:52: Yield curve.

00:03:53: That would hint at a possible recession.

00:03:55: So we are getting farther away from that scenario Right now, as such the risk assets are happy.

00:04:00: The S&P five hundred closed last week with a point seventy-five percent jump.

00:04:05: on Friday's trading session We're just a few points below all time high level right?

00:04:10: Now there while Nasdaq under traded fresh record High On Friday Asian technology stocks open the weak on a positive note yet There still negative mood across global bond markets stay in.

00:04:20: their headlines described cooling energy prices and Technology stocks are doing it little bit better than they rest of the sector.

00:04:27: so With bonds still off continues this week, major indices could find it difficult to maintain gains and non-technology pockets will continue on Wednesday.

00:04:48: But in the absence of major news and data this week, investors' attention will remain on bond markets especially on European bond markets where things are getting heated because last week remember the spread between the French and German ten-year yield spike passed to one hundred fifty basis points.

00:05:06: that was the highest since crisis back in two thousand eleven two thousand twelve and lure is notably waiting on the euro.

00:05:16: The euro dollars just slipped below the one-twelve level this morning a seventeen month low, And the year it's also falling by big chunks against sterling and swiss frank as well an options markets show.

00:05:28: investors are paying a hefty premium today to hedge against further euro weakness.

00:05:33: In summary no one wants to be sailing in euros As the wind picks up.

00:05:38: why?

00:05:38: because higher Yields alone won't convince investors to come back if confidence in the country's ability to put its finances and order keeps deteriorating.

00:05:48: And higher borrowing costs gradually make that task harder, mind you because more money goes into servicing debt when yields go higher leaving less room for everything else.

00:06:00: while The political situation is not bright right in France as you probably know now popular far-right ambitions don't necessarily suggest budget discipline.

00:06:09: So the problem is, do politicians need investors to play along?

00:06:12: To finance their ambitions?

00:06:14: if investors say no then it IS NO!

00:06:16: Look at Great Britain.

00:06:17: If you don't believe me Now good news that for now The Problem Is Mostly France centric for the brother euro area.

00:06:24: what would worry me most is a sustained widening in other countries spreads.

00:06:30: looking at market today we see this spread between the german versus italian spanish portuguese and greek barn eels widened as well but note that they are nowhere near to two thousand ten, two thousand twelve levels.

00:06:45: We're very far away from these levels.

00:06:47: so there not suggesting more than slight stress across area for now is obviously worth watching whether the yield spreads wide and more from here because normal rise would suggest that investors are reassessing European risk more broadly rather than simply demanding more compensation for holding the French debt.

00:07:08: So this week's auctions will give us some clues about where investors' appetite stands, France will be selling short-term bills as soon as today, Austria comes to market tomorrow and Germany will be or whether the nervousness starts spreading.

00:07:28: Across the Atlantic Ocean, US ten and thirty year auctions could also add another layer of pressure if investors demand still higher yields there while European bonds may struggle to fine relief.

00:07:41: Now staying in Europe, thankfully the European Central Bank has a tool called the Transmission Protection Instrument TPI which allows the European central bank to buy government bonds to counter unjustified and disorderly market moves.

00:07:57: There is no magic spread level that automatically triggers an intervention from the European-Central Bank And support comes with conditions.

00:08:04: unfortunately for France The last thing the ECB wants do here Is to finance link debt, right?

00:08:11: Therefore the ECB will first assess the fiscal discipline of a country that sustainability and economic policies before stepping in.

00:08:20: And this is where it might be a bit complicated for France because it's still off-driven by deteriorating French fundamentals but make intervention from the European Central Bank harder to justify...and Therefore, only a convincing fiscal agreement in France could bring relief to the country and to the broader European markets.

00:08:42: Continued political paralysis on the other hand could keep investors on the sidelines And Europe's stock markets would remain under pressure.

00:08:50: For now I will call what is happening in Europe.

00:08:53: It was named confidence shock.

00:08:55: Whether it becomes full blown crisis depends contagion and how policymakers respond.

00:09:01: I hope that we are going to stop before coming to that point, but for now the euro and Euro-denominated assets will likely remain under pressure until we have more clarity!

00:09:11: So this is all for this Monday morning.

00:09:14: i'm Ipeco Skardyshkoja And thank you for joining me and Thank You For All Your Beautiful And Supportive Commands.

00:09:21: This episode of Market Talk has been helpful and it's insightful to you, so please do not hesitate to leave your comments, reactions or questions below.

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00:09:47: Let me try again tomorrow.

00:09:52: That's all then, good day

00:10:08: trading!