What's on Your Radar Screen?

The US dollar is posting modest gains across the board, the notable exception of the Japanese yen, on the back of what appears to be largely a risk-off day. The MSCI Asia Pacific Index shed 0.2%, while the Dow Jones Stoxx 600 is off 0.5% late in London's morning. Spanish and Italian bond yields are higher. Emerging market currencies are mostly lower.

With short-term momentum indicators a bit stretched, this week's big events still ahead and a fainter signal from the US today with the closure of the stock market to precautions ahead storm, it may be difficult to significantly build on today's price action.

Berlusconi's rant over the weekend has drawn some attention. It was an emotional outburst after having been found guilty on tax fraud charges. His threat to withdraw support from Monti's technocrat government is likely a hollow threat as he, and his party, no longer wield the kind of power it once did. Moreover, elections are already planned for next spring. Nevertheless, obstructionist politics can take a toll on 2013 budget effort and underscores the impression political instability underneath the calm of the Monti government. Italian bonds and stocks are under-performing today.

Yet it is news from Spain that is more troubling. After last week's news of the Q3 rise in unemployment above 25%, it should not be surprising that consumption is drying up. Today Spain reported retail sales fell 10.9% from a year ago (work day adjustment basis). This follows a 2% decline in August. The Bloomberg consensus called for a 6.2% decline. Note that in real terms, the decline was even worse at -12.6%. Spain reports Q3 GDP tomorrow. A 0.4% contraction has already been tipped.

Rajoy's room to maneuver is narrowing. The request from the regions has already exhausted the earmarked funds. The projections that allow some to suggest that Spain's financing needs for the year have been completed appear to be assuming the deficit target not the likely overshoot. The government's cash reserves have also dwindled. Last week Spanish bonds turned in their worst performance in two months and this turn is a drag on Spanish banks, which is among the weakest equity sectors.

Elsewhere, since the controversial Outright Market Transaction announcement, Draghi has prevented a larger fissure with Germany by underscoring the conditionality that will be imposed, drawing a distinction between "unlimited" and "uncontrolled", and by endorsing Schaeuble's call for expanding the power of the EU monetary affairs commissioner role in approving (or not) members' budgets.  

The ECB and Germany may still come to loggerheads over an official sector restructuring of Greece's debt, which would seem exclude the IMF and the ECB.  Reports suggest the ECB is willing forego profit, but it might be also be persuaded to extend the duration.    Schaeuble is dead set against and, before,the weekend, once again, raised possibility of a Greek exit.  

The Swedish krona has responded well to an unexpectedly large rise in September retail sales.  The 1.7% (month-over-month) gain was more than four-times more than the Bloomberg consensus forecast.  Norway's central bank meets later this week and is widely expected to leave rates steady, though may push out further in time a rate hike.  

For its part, the dollar has been confined to a 10-tick range on either side of JPY79.65.  The 200-day moving average comes in near JPY79.50.  

Japan reported a disappointing 0.4% increase (year-over-year) in September retail sales.    The real focus is on the BOJ meeting which concludes tomorrow.  At least a JPY10 trillion expansion of its asset purchase program is anticipated, though there is some talk an increase twice as large.  The BOJ will likely extend the duration of the operation, currently to be completed by the end of 2013.   A JPY20 trillion increase would likely see the period extend to the end of 2014.  

Japan also releases other data tomorrow.  The pace of household spending is expected to slow considerably as the effect of the government auto subsides influences the base effect.  Nevertheless, weak domestic and foreign demand means that industrial output likely fell for its third consecutive month and at an accelerating pace.