Talks on a Eurozone banking union have run into serious disagreement, raising doubts over whether France, Germany and non-Eurozone countries can agree the blueprint for a single Eurozone bank supervisor by the end of the year. EU finance ministers meeting in Cyprus on Saturday aired differences over a Brussels proposal that would establish the type of supervision that would be a necessary first step to common bailouts for struggling Eurozone banks. Germany, Sweden, Poland and the Netherlands called for a more “realistic” negotiating timetable to resolve the problems, suggesting a talks will run into 2013. Anders Borg, Sweden’s finance minister, said it was “undecidable and not acceptable” to aim for a deal by the end of the year, The Financial Times says.
The past week has provided much to boost market sentiment. The German Constitutional Court ruling, Dutch Elections and the Federal Reserve’s latest announcement of ‘open-ended’ quantitative easing (albeit at a cautious pace of $40bn in purely MBS for now) have all added to a more upbeat mood in markets. This is reflected in equity markets, with European equities up around 2% on the week and reaching levels not seen since summer 2011.
The significant improvement in euro area peripheral sovereign yields and the rush of corporate debt issuance that has followed the ECB’s latest policy measures should suggest a marked easing in financing conditions. In turn this should provide a boost to peripheral economic activity, which is also likely to benefit from a broader improvement in confidence. Yet this week is probably too soon to expect forward-looking survey evidence to point to significant signs of firmer economic activity. We forecast a rise in the euro area’s ‘flash’ estimates of September’s PMIs, although warn that these are still likely to remain at levels suggesting economic contraction for now. The German ZEW survey should also show signs of turning this month. The key question for the euro area is whether financing conditions can remain more benign for long enough to revive activity. This will depend on how long markets are prepared to keep yields at these levels in the absence of actual ECB purchases. The current informal Ecofin meeting and subsequent meetings in early October will have a major bearing on this.
After a couple of busy weeks in the euro area, it is likely we are now heading for more calm waters. On the political agenda, the most important event in the coming week is Spanish PM Rajoy’s meeting with Monti in Rome on Friday. Speculation on when (and whether) Spain will ask for EFSF assistance is likely to be a central market theme. It could be that Spain will have to be tested before it asks for help. Danske expect Spain to ask for a precautionary programme at some point over the autumn. This programme is meant to be less stigmatising than a full-scale macroeconomic adjustment programme.
Danske expect German, French and euro area PMIs to attract market attention. The leading indicators have stabilised recently. Danske expect to see a small uptick in the September reading, with the level remaining consistent with another fall in GDP in Q3. Danske also expect to see a minor uptick in the ZEW indicator, which tends to be sensitive to market sentiment. Also, the European Commission’s data on consumer confidence is likely to show a minor improvement from very downbeat levels. Overall, Danske expect to see a minor improvement in the leading indicators and growth to turn positive as we enter Q1.
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