There are two major topics dominating the global financial markets. Europe is taking the lead due to numerous problems in the Euro-zone and weak economic signals coming from USA, which is considered the global economic power. In percentage terms, the total global trade share of Europe and USA is over 70 pct that includes exports and imports.
The problem is that the current size of global debt has reached close to about USD 200 trillion, which is 3-times the size of global GDP. In 2002, it was estimated that the size of global debt was roughly around USD 85 trillion. Weather it’s lending or borrowing, funding or generating of funds, every economic activity is somehow or the other is linked to debt.
Debt is now leading the world’s financial misery. Spain that has sucked in EURO 330 billion funding needs more money for bank capitalization as it still remains a big threat to global economies and if the problem is not temporarily sorted out it will spill over into the Euro region banks that can drag other leading global economies. Some of the estimates suggest that Spain’s banking system still needs around EURO 250 billion to overcome the problem.
On Friday, Fitch rating agencies was quick to sense the problem and downgraded Spain’s long-term credit rating by 3-nothches to BBB, which are 2-notches above “JUNK” with “Outlook Negative”.
I am sure that in their meeting, financial stability will be the key talking point for the European policy makers that needs quick attention and some sort of announcement before June 17 Greece election to avoid spill over that could lead to financial market collapse. Therefore, to accommodate Spain, bailout money has to be made available by once again breaching the
European laws with conditionality attached to save their faces.
Meanwhile, another major event coming is FED’s FOMC meeting in next 10-days time. There is a huge debate going on that if FED will opt for quantitative easing (QE3), which is basically pumping of liquidity in to the banking system through purchase of T/Bills and Bonds, or FED will consider extending USD 400 billion twists, which is swapping short-term bonds with longer duration that helps to keep 10- years and 30-years bonds yield low.
This market will be focusing on speeches from FED officials prior to FOMC announcement for clues about monetary policy. Some of the other major economic events are release of economic data’s. On Monday, main event will be speeches by 2-Fed official. On Tuesday, UK’s industrial and manufacturing production data will tell us about short term growth an important GDP growth component. Later in USA will be releasing quite a few economic data’s, which may be of less importance but will provide feeler about the economic performance. On Wednesday, quite a few economic numbers will be released, but German CPI will be keenly watched. However, USA will release barrage of economic numbers PPI, Retail Sales and Business Inventories that could help in determining next policy direction. Thursday is another active day and the major event of the day will be decision on Swiss Interest Rate followed by ECB monthly report and data. Later, US CPI, Jobless claim and Current Account data will give more clues about the economy. Friday is another bus day in terms of economic data, which will provide more evidence about the global economic activity. The day will start with BOJ decision on interest rate to be followed with UK Trade Balance number, then European Monetary Union will make announcement on trade balance with all eyes on USA for release of quite a few data’s of which, Industrial Production and Michigan Consumer Sentiment Index are important US economic indicators.
LasT WeeK - JunE 04-08