Economic sentiment set to reveal a decline in Europe

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Data releases will be relegated to background noise but what there is will not help sentiment. Indications of slowing activity remain apparent as revealed in disappointing eurozone manufacturing surveys last week and this could be repeated in the US ISM manufacturing survey later this week. Economic sentiment gauges in Europe are also set to reveal a decline. Given the lack of fire power and/or unwillingness to risk using further stimulus from the Fed, the sensitivity of markets to weak data will be high, keeping risk aversion elevated.

Risk aversion is back on the menu with continued doubts over Greece and uncertainties about weaker economic data weigh heavily on market sentiment. A number of key events rather than headline data will be the main drivers this week. First on the agenda is the vote in the Greek parliament on the country’s budget reform plan, which if approved will pave the way for the way for a pay-out of EUR 12 billion from the EU/IMF and a complete new bailout agreement.

Stateside and talks on raising the debt ceiling are likely to recommence, with the market likely to become increasingly nervous about the lack of agreement on the issue. However, it is Europe that will be under the spot light and even if the restructuring plan is passed any market support is expected to be limited given the ongoing qualm about private sector contribution in any Greek debt roll over. This suggests that the EUR will remain under pressure over the week despite supportive comments from Chinese Premier Wen.

Without a doubt, the end of the Fed’s QE2 this week will mark a major shift in market dynamics, especially in currency markets where the USD will finally see a massive weight lifted from its shoulders. As indicated by Fed Chairman Bernanke following the FOMC meeting the Fed is not allowing for a further round of asset purchases, a fact that will help the USD to find firmer support.

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Economic sentiment set to reveal a decline in Europe

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