Market Drivers September 12, 2012
German court approves ESM with conditions sending EURUSD through 1.2900
UK employment picture improves
Nikkei up 1.73% Europe up 0.87%
Oil $97.97/bbl
Gold $1745/oz.

Europe and Asia:
AUD Westpac Consumer Confidence 1.6% vs. -2.5%
AUD Dwelling Starts 4.6% vs. 2.7%
EUR Constitutional Court Announces ESM Ruling -yes
EUR German CPI 0.4% vs. 0.3%
EUR Eurozone Industrial Production
GBP Jobless Claims -15K vs. 0.1K
GBP Average Weekly Earnings 1.5% vs. 1.54
GBP ILO Unemployment Rate 8.1% vs. 8.0%

North America:
USD DOE US Crude Oil Inventories 10:30

The euro rose to fresh 4 month highs breaking through the 1.2900 barrier in the wake of German constitutional court ruling that approved the ESM mechanism. The news helped to lower the yields on both Italian and Spanish sovereign debt with Italian 10 year bonds dropping below the key 5% level while Spanish bonds compressed to 5.6%. Only a few weeks ago Spain’s bonds skyrocketed above 7% creating a state of crisis in EU.

The German court ruling contained one key stipulation limiting the German contribution to the ESM to 190 Billion euros which was the original sum in the proposal. Any further funding would require the parliamentary approval of both German houses. The ESM structure as it stands now clearly does not have the scale to backstop any serious bailout needs for either Spain or Italy, but the markets seemed unperturbed by the ruling as most players believed that if further financing was needed the Bundestag would approve it or better yet the ECB could effectively take the bonds off the ESM balance sheet effectively recapitalizing the fund.

Since the ECB has committed to open ended buying in the secondary market and the ESM is approved to buy in the primary market the European policy makers could combine the two to create an “unlimited” conduit for liquidity in the region’s sovereign debt market capping the financing costs of the beleaguered periphery credits. Although this was clearly not the intent of the German constitutional court it does provide a much greater degree of flexibility for monetary officials to contain any further market disruptions in the credit markets and should help both Spain and Italy to complete its financing for the year at markedly lower costs than prevailed just a few weeks ago.

On other news UK employment picture improved with jobless claims declining by -15K versus an expected increase of 0.1K. This was the biggest decline since June of 2010 and is the latest data point to suggest that growth in UK may better than the consensus view. Cable broke above the 1.6100 level ahead of the release and has remained bid as risk tone continues to be positive.

With no major data on the US calendar the only other event risk of note will be the Dutch election which appears to be tilting towards the pro-euro parties. Although the euro rally is clearly extended, today’s positive ruling from the court solidifies the view that European officials are getting control over the sovereign debt crisis issue and the momentum remains on the side of the bulls. If risk flows prove positive in North American session then the pair may make a run at the key 1.3000 barrier as the day proceeds.

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