KEY UPDATES
Spain deficit
target in doubt
Differing opinions between government, regions and
towns over deficit reduction in Spain are threatening the country’s attempt to
cut its budget deficits. Spain’s target of budget deficits of 6.3% of GDP this
year and 4.5% in 2013 may not be achieved and PM Mariano Rajoy is staring at
the possibility of taking up the full bailout option from Europe.
There are some regions that refuse to cut free
health care on illegal immigrants while some towns subsidize schools and
providing compensations for wage cuts on civil servants. If these matters
cannot be solved, the 100 billion euros of aid from Europe may not be enough
and this could send the budget gaps to 8.9% this year. As a result, Spain’s
10-year yield which has recently rallied to 6.2% from 6.9% could run into brick
wall and fizzled.
Fortunately, Standard & Poor’s said that should
Spain ask for a full sovereign bailout, its credit rating may not be affected
as such aid may actually help the ailing economy to continue its reforms. At
the moment, Spain is rated BBB+ by the S&P, BBB at Fitch and Baa3 at Moody’s.
Fed members
tilted towards more easing
FOMC minutes released recently pointed at the
possibility of additional stimulus from the Federal Reserve if the economy
continues to show sluggish improvements. According to the minutes, many members
judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information
pointed to a substantial and sustainable strengthening in the pace of the
economic recovery.
The kind of stimulus that the minutes referred to is
a new large-scale asset-purchase program. While some members of the FOMC were
concerned over the impact of such purchases of Treasury securities, the minutes
noted that a staff analysis showed substantial capacity for additional
purchases without disrupting the debt markets. At the previous occasion, the
FOMC stated that economic conditions warrant exceptionally low levels for the
fed funds rate at least through late 2014.
On the policy guidance, the FOMC members decided to
wait until September meeting when they have new economic data to update their
economic forecasts. Based on the minutes, there were a few who suggested that
the committee switched the date with changes in the economy which would be the
trigger for the FOMC to raise the fed funds rate. Other idea was to eliminate
guidance entirely.
China
unleashed reverse-repo, Japan’s exports faltered
Through its seven- and 14-day reverse-repo
agreements, PBOC has added 220 billion yuan in its bid to ease a cash squeeze
in the financial system. While other tools are also available to loosen up its
monetary policy, the PBOC seems to keep its options such as reserve requirement
ratio and interest rates intact. It remains to be seen whether this policy will
bring any significant impact to the economy. China was seen as the most likely
one of the three (along with Europe and U.S.) to respond to the recent slowdown
in the economy.
Elsewhere in Asia, data from the Japanese Finance
Ministry showed that Japan scored a 517.4 billion yen of trade deficit in July,
partly caused by European crisis and Chinese slowdown which dragged down
exports. In June, the economy scored a surplus of 60.3 billion yen while the
median forecast was at 270 billion yen.
Days Ahead
While the China finally made its move to ease up the
monetary policy, the Fed may wait until September before taking an action, if
and only if the economy fails to show improvements. Europe may wait for
September as well until the authorities start to meet again over their efforts
in finding the solutions for the current fiscal crisis. Greece will be under
the spotlight as PM Antonis Samaras will meet euro zone leader Jean-Claude
Juncker next Wednesday and then Chancellor Angela Merkel afterwards on Friday.
Then, Samaras will also meet up with French Francois Hollande a day afterwards.
Samaras will talk about giving Greece more time for reforms. In the meantime,
the global market may consolidate until more significant news are available or
crawls higher on positive expectations over Fed’s decision. On the domestic
front, the market is likely to edge higher, catching up with the global market’s
movement after a long holiday break.
Written by Unknown
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