NEW YORK (BBH FX Strategy) -- Risk sentiment has soured sharply in the run-up to the Non-Farm Payroll report. Defensive plays dominate price action across asset classes. European equities have sold off sharply in the a.m. session with the Euro Stoxx down 2.4%, on weakness across financials (-3.2%), basic materials (-3%), industrials (-2.6%) and oil and gas (-2.1%).
National bourses are deeply in the red, led by the periphery with Greece underperforming sharply, down 4%. The euro remains sharply weaker across the board weighed down by news of a premature end to the "Troika" International Monetary Fund/European Union/European Central Bank consultation with Greece, as well as more negative unemployment figures out of Spain. The biggest risk is that the ECB runs out of "political credibility" capital to continue purchases of government bonds in the periphery and the sharp spike in Italian (plus 13 basis points) and Spanish ( plus 9 basis points) 10-year spreads against Germany's benchmark this morning suggest that European financial systemic stresses are back on the rise as the ECB retreats.
Reserve managers continue to defend the 1.42 level for EUR-USD but the 1.11 level for EUR-CHF has come under attack and EUR-JPY continues to trade heavy below 110 in spite of growing intervention fears.
Greece and eurozone developments are also taking a turn for the worse. Greece's meeting with the troika was reportedly called off, with the troika leaving Athens. Greece Finance Minister Venizelos said that the meeting was temporarily suspended to further study data and that talks will resume in mid-September.
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Greek press reported that the impasse is coming from government reluctance to take steps to fill a 1% of GDP budget gap. While this sort of back and forth is not that unusual in an IMF program that is starting to go off the rails, the stakes are high and such public disagreements sharpen already heightened market nervousness.
The U.S. August NFP is set to test market nerves today. Consensus surveys place expectations for the August US non-farm payrolls gain at just below 70,000 but in reality the dispersion of expectations is extraordinarily wide, ranging from -10,000 to 160,000, which mirrors the type of exceptional volatility that accompanies turning points of the real growth cycle.
The unexpected 50-basis-point cut by Brazil added to negative market sentiment, with emerging markets foreign exchange largely weaker in the aftermath. No surprise that BRL underperformed Thursday, but EM weakness has carried over into today. TRY has taken it on the chin today, highlighting what we think will be a recurring theme for EM going into year-end. That is, countries that are running questionable macro policies are likely to underperform. Lira weakness was also aided by weak PMI today, with Turkey reporting a sub-50 number of 48.8 in August vs. 52.3 in July.
