Overnight Summary: The Karlsruhe Konstitutional Knights Don't Say Ni(en) Yet
Overnight highlights via SocGen:
- ESM plaintiff bid over ECB program will not delay September 12 ESM ruling
- Spain PM Rajoy vows to not cut pensions, will consider conditions before requesting any aid
- German finmin Schaeuble: Spain doing well with its reform efforts, will not need sovereign aid
- Nikkei -0.70%, 10y Bund yield down 1.5bp at 1.53%
The key event overnight was the German constitutional court's announcement shortly after 8 am CET in which the Konstitutional Krimson Kardinals announced that, as largely expected by everyone except the EURUSD trading algos, there would be no delay in the September 12, 10 am CET injunction decision, as a result of the last minute bid by Peter Gauweiler. As Bloomberg reported, “It’s no surprise the court won’t change its plan,” said Christoph Ohler, a professor of European law at Jena University. “You cannot directly sue over the acts of European institutions in a German court, so it’s difficult to introduce these arguments in this case." The decision to press ahead with the ruling will probably bolster the German government’s faith that the bailout facility will get the court’s backing. German Finance Minister Wolfgang Schaeuble told students last week he was confident the ESM would be approved. “Europe won’t collapse on Sept. 12,” Franz Mayer, a law professor at Bielefeld University, said in an interview last week. “In the end, the court will allow Germany to ratify the ESM, but there will probably be some strings attached. The bigger issue than the actual ruling is what extra language the court will add to the reasoning on where the limits are in the future,” said Mayer. “The markets seem to be quite afraid the judges may spoil certain options for the future, like collectivization of debt within the euro zone." Which leads us to the quote of the morning when even Schauble it appears is channeling Clinton after he said that interpretations on the word "unlimited" can vary. No they can't, and this is precisely the issue that the judges will take offense with, if anything.
For all other overnight news we go to DB's Jim Reid:
In other European headlines, Spain’s PM Rajoy reiterated in an interview on state television that his team are “studying bailout conditions”. Rajoy added that he “will not accept that they tell us which are the concrete policies which we have to cut or not cut”, although Rahoy did express confidence that should his country request aid, it would indeed receive it. There were some more upbeat comments from German Finance Minister Schauble who was reported as saying to German coalition members in a closed-door meeting that Spain doesn’t need a full sovereign bailout. Schauble praised Spanish and Italian reform efforts and said that Spain doesn’t need to apply for a full program because economic and fiscal progress made since implementing reforms mean that a full bailout isn’t necessary (Bloomberg). Finally, Moody’s commented that the ECB’s OMT program will not resolve the European debt crisis and do no more than buy time. However the agency recognises that the program will support continued access to debt markets for peripheral sovereigns and banks.
Moving to overnight markets, Asian is trading lower led by the Nikkei (-0.8%) and Hang Seng (-0.6%). Chinese equities are also trading heavy (Shanghai Comp -1%) despite data from the PBOC showing RMB704bn of new loans in August, the highest level ever for an August and beating forecasts of RMB600bn. In response to the recent news of transport infrastructure project approvals in China, Jun Ma has commented that these plans are not new stimulus, but are in fact part of the government’s 12th Five Year Plan released in March 2012. Jun believes that the near-term impact of these projects on GDP is negligible.
Looking at the day ahead, the data docket will be relatively light with the only major release being the US trade balance for July (market is expecting the deficit to widen to -$44.4bn deficit vs -$42.9bn in the previous month). The European calendar is also light with the main data releases of interest being the UK’s RICS house price survey and July’s trade balance. We may also get further headlines from Greek PM Samaras’ meeting with Draghi today.
Finally, some interesting observations out of SocGen two days ahead of the FOMC decision:
The bond market is not behaving as if there is a strong conviction among investors that the Fed will announce more QE this week. Benchmark 10y rates and swaps in the US continued to back up yesterday and have added some 9bp since Friday's post-payrolls low. This is not to say that the Fed will not pull the trigger, but it shows that expectations are not overwhelming and there is a risk of disappointment that the initiative may not be as far reaching as hoped, in the sense of a flat Fed funds rate until 2015 and a sizeable ABS/UST purchase programme. Tracing back the more confident mood to the ECB, equity indices have nudged gains of 2.4% in the eurozone and the US since last Thursday, whilst commodities too have been given a lift, with the CRB index advancing over 310 and iron ore recovering to $95. Maybe we should not be fazed too much by what the Fed does or does not do this week. The impact of the operation Twist programmes and QE on currency and other markets has tended to wear off pretty swiftly and there is not much the Fed can do anyway to lift the participation rate.