Currencies Rise, Stocks Weaken

NEW YORK ( BBH FX Strategy) -- Waning risk appetite from the U.S. session carried over into Asia and the European session as equity markets remained on the back foot amid doubts about expectations underpinning this weekend's summit.

Reports indicate there is French and German disagreement about how best to leverage the European Financial Stability Facility, holding up negotiations. Spain's disappointing auction also weighed on sentiment.

Nevertheless, currencies are paring back some of their overnight losses ahead of the North American open in part on guidelines posted in regard to the EFSF. Overall, the document outlined the basic principles agreed to July 21, including the guidelines for future bond purchases by the EFSF.

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The European calendar had German September PPI steady at 5.5%, while UK September retail sales beat expectations. S&P futures point to a modest open, up 0.6%, with the Philly Fed and jobless numbers the key morning reports. As expected, Brazil cut its policy rate overnight by 50 basis points, while the Philippines kept its rate on hold at 4.5%. Turkey left its policy rate unchanged at 5.75%.

Market sentiment continues to be dominated by headlines from Europe, making price action more volatile and prone to sudden whiplash. The final vote on the austerity bill in Greece will be the main focus today, with Parliament having passed a preliminary vote last night, despite the violent protests that continue in Athens. We expect the vote will pass but suspect that the market reaction is likely to remain limited ahead of this weekend's ECOFIN Summit. Disagreements over leveraging the EFSF are likely to lead to an outcome that might fall short of market expectations.

In the UK, retail sales exceeded expectations, but some of the strength in the headline was diminished by backend revisions. With real earnings falling by over 3%, households are either sharply scaling back their spending on consumer services or are saving a far smaller proportion of their income. That means, looking ahead soft consumer spending and weak confidence is likely to hamper growth for some time to come. A combination of short positioning and negative sentiment is likely to be supportive of sterling on goods news, but with a recent failure to break levels near 1.5848 we see risks for GBP to test levels near 1.563.

Emerging market stocks are falling today by the most in several weeks. News that China's Shanghai Composite fell to cyclical lows and is now at its lowest level in 31 months has seen some talk beginning to surface of a relaxation of efforts tighten lending. Energy, financials, and consumer shares led the declines.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.