ZEW Sentiment Expected to be Hit by Debt Concerns

Debt problems remain a worry despite soothing noises by policymakers on both sides of the Atlantic, German and Eurozone ZEW survey due, RBA minutes show dovish/hawkish tone

New gold price highs against the US dollar, the euro and the pound continue to highlight the fact that despite soothing noises from policymakers on both sides of the Atlantic, investors remain concerned about the prospects of any type of agreement this week in Europe and in time for August 2nd in the US. In the case of the US agreement would have to be reached well before the 2nd August in order for the legislation to be passed in time.

ECB President Jean Claude Trichet last night reinforced his message that the current risks to the euro zone economic outlook looks balanced and that the exit of any euro member is not envisaged in any respect. This despite the fact that the new Portugal Prime Minister announced a 2bn hole in the countrys public finances left by the previous incumbents no doubt, making the hole that Portugal has to dig itself out of even bigger than originally thought.

Rising Spanish and Italian 10 year bond yields continue to weigh on sentiment despite rumours of Chinese buying of EURUSD in the US afternoon session last night. With these yields at post euro record highs todays Spanish auction of 4.5bn of 12 and 18 month t-bills is likely to be closely monitored with respect to the rates and bid to cover ratios relative to previous auctions.

In the US the Republican controlled house is due to vote on its $2.4trn worth of measures to raise the debt ceiling in what is purely seen as a cosmetic move given that President Obama has already said he will veto it. The President is determined that tax rises and the closure of tax loopholes must accompany any spending cuts delivered.

Later this morning the latest ZEW economic sentiment surveys for July for Germany and the Euro zone are set to be published and given the recent negative sentiment it would be a major surprise if they werent worse than Junes figures. Expectations for Germany are for a decline of -12.5 from -9 in June, while Eurozone ZEW is expected to slip to -7.4, from -5.9.

The latest July RBA minutes showed that a slightly more dovish tone with the reference to tighter policy at some stage, conspicuous by its absence, which has played slightly negatively sending the AUD lower in the Asia session. The next quarterly inflation report at the end of July will be closely monitored especially in light of Westpacs report last week that rates could be lower by the end of the year.

Later this afternoon US Housing starts for June are due as well as the Bank of Canada rate decision.