TORONTO (Reuters) - Deficit pledges made by Group of 20 leaders on Sunday won’t provide a big boost for financial markets, with uncertainty about the strength of global economic recovery still the larger concern for investors.
Analysts said that while targets for debt and deficit ratios included in a communique issued by G20 leaders were a mild positive, they were skeptical about their implementation and warned markets are focused on broader issues right now.
“Any language that is going to address the deficit issue, even if it’s tenuous at best, should be positive for the currency markets, positive for the risk trades because capital markets clearly want to see some sort of containment in spending,” said Boris Schlossberg, director of currency research at GFT.
“It should be positive for the euro,” he added.
But the New York-based analyst said the event generated few surprises overall and “the market is going to remain in a state of flux after this.”
Investors may be relieved by agreement between President Barack Obama and British Prime Minister David Cameron on Saturday that there was nothing to be gained from damaging BP. The energy giant’s stock has taken a drubbing to a 14-year low, wiping out $100 billion in market value, since the Gulf of Mexico oil spill on April 20.
As they worked to put the global economy on a more stable footing, world leaders meeting in Toronto backed away from one-size-fits-all pledges.
Coming into the meeting, U.S. officials had urged that leaders not move too quickly to cut fiscal stimulus, while many European officials, alarmed by Greece’s financial crisis, put more onus on austerity.
The group of developed and emerging nations said it would follow through on delivering existing stimulus plans, while highlighting the importance of properly phased plans to “deliver fiscal sustainability”.
Specifically, it said the group would aim to at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.
“In terms of near-term deficit reduction, with no offsetting demand elsewhere, the global outlook is still vulnerable over the next year,” said Mark Chandler, head of Canada fixed income and currency strategy at RBC Capital Markets.
While the broad theme of cutting deficits has been a well-worn topic, one of the key challenges is its implementation, which could ultimately put pressure on risk sentiment.
“It’ll all be about timelines and whether the market actually buys into three years as being achievable,” said Dean Popplewell, chief currency strategist at OANDA.
“I still believe that we’ll be in the risk aversion trading strategies,” he added. “It will certainly act negatively toward the euro in the short term. Basically it should be (U.S.) dollar positive and euro negative.”
CAUTION MAIN WATCHWORD
The euro zone’s debt crisis and the world’s economic health have been underpinning global trading sentiment, with glimmers of hope sparking rallies, but caution was still the main watchword.
Funding issues in the euro zone are still an issue, as banks need to repay some 442 billion euros in one-year loans to the European Central Bank this week.
Other G20 conflict zones include trade and China’s yuan currency. Highlighting China’s sensitivity over the issue of its recent shift toward greater exchange rate flexibility, world leaders removed a pointed reference to the move in the final communique.
But challenges clearly remain outside of the events this weekend with a fragile economic recovery.
“This isn’t the only factor in the markets. If this was the only factor in the markets I think it would be bearish,” said Carl Birkelbach, head of Birkelbach Management in Chicago.
“There’s continued uncertainty.”
Data this Friday is expected to show the U.S. economy shed 110,000 jobs in June, although that largely reflects the end of temporary positions for the once-a-decade Census. Economists polled by Reuters think the unemployment rate ticked up to 9.8 percent.
Additional reporting by Claire Sibonney, additional writing by Jeffrey Hodgson; Editing by Mario Di Simine
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