Money markets have held steady as they await details of an agreement to resolve the eurozone debt crisis.Stock markets and the euro rose in early trading before falling back.

Although a weekend summit of eurozone leaders was inconclusive, the outline of a deal was agreed, with a summit to finalise details set for Wednesday.

Eurozone leaders agreed to force banks to protect themselves against future losses, and to increase the firepower of the single currency’s bailout fund.

Following a robust rally in Asian markets, European stock markets had been up 0.5%-1% in the first hour of Monday trading on the apparent progress at the talks.

Asian markets had been lifted by positive data from China and Japan, as well as the apparent progress in Brussels.

But European markets later fell back, and by mid-afternoon trading the Cac 40 index in France and the German Dax were both fractionally lower, while London’s FTSE 100 was up just 0.3%.

Market sentiment was not helped by industry surveys released during the morning that suggested the French and German economies are still struggling to avoid recession.

However, key points of disagreement remain.

France had hoped that the European Central Bank (ECB) would support the EFSF, by providing it with loans that could increase the fund’s total capacity to 2tn-3tn euros.

But this idea was blocked by Angela Merkel.

Instead, governments are expected to agree that the EFSF can help out troubled eurozone governments such as Italy and Spain by providing partial guarantees to investors and banks who lend them more money.

There was also disagreement over the extent of losses that should be imposed on Greece’s lenders, with Germany seeking a 50%-60% haircut.

The ECB opposes any such increase, according to a footnote in an internal document on the Greek economy leaked over the weekend.

There are fears that a unilateral default by Greece – such as a debt write-off without lenders’ consent – could have unforeseen consequences, for instance by triggering payments under credit derivative contracts.

Another unknown element in talks is whether and how much non-European countries may provide support.

The price of copper – an indicator of market sentiment over the global economy – rose 6% in Shanghai trading. But after the markets opened in Europe, the rally lost some of its lustre.

The euro followed a similar pattern, rising half a cent against the dollar, before dropping back. By mid-afternoon in Europe it was trading at about $1.386, down 0.2% for the day.

German ratification of an enlarged eurozone bail out fund was supposed to calm market nerves going into the weekend.However sentiment remains downbeat in early trading today and we can expect equity markets and risk on currencies to continue to struggle this afternoon and in the early part of next week.

Today is the end of the third quarter and with financial institutions set to report earnings over the next couple of weeks there is usually increased volatility as last minute balance sheet window dressing taking place, so be prepared for greater than usually swings in parings today.

Markets remain sceptical that European politicians have the political will and ability to finally put this crisis to bed because of the fragmented nature of the political system between member countries.

This is why we are hearing strong words from across the Atlantic about the need to for further enlargement of the bail-out fund, its current size would not support both Spain and Italy and the Germans have explicitly capped its size at the current €440 bn.

The New Zealand Dollar, not often mentioned by Wise Money was the big mover in the currency markets overnight after Standard & Poor’s downgraded their credit rating one notch from AA+ to AA.

The Kiwi Dollar responded immediately, falling across the board and compounding its recent declines on the back of the deteriorating outlook for global growth.

Which- if you have gone to see the rugby world cup will make buying any more kiwi dollars more competitively priced.

All of the so called commodity currencies are closely correlated to the outlook for world growth and it is the recent revisions by the IMF and other agencies that are the main reason the strongly performing high yield currencys like the Kiwi and Aussie Dollar and the South African Rand has lost ground against Sterling and the Dollar.

Sterling’s recent resurgence hit the skids this morning after manufacturing and lending economic data both disappointed expectations.The PMI survey for the manufacturing sector came in at 52.10, well below the estimated 54.20 proving that the UK economy continues to struggle in 2011.

Mortgage approvals were also down while Money Supply, the figure that measures the worth of assets held by the public rose less than expected.

The weakness in Sterling has been compounded by some euro strength.

News that a solution to the Greek short term funding difficulties has been established has boosted the supported the single currency.

The crux of it appears to be that a proposal from certain core Eurozone countries for an early rescheduling of Greek debt would be dropped and that a new package of aid loans for the country was being hammered out.

Putting a package together by the end of June that is both water tight for the money markets and acceptable to the ‘lenders’ looks a tall order.

The likelihood of success is further undermined by a report in the German newspaper, Frankfurter Allgemeine Zeitung that said that it was now an almost cast iron certainty that the IMF will not pay across its proportion of the 5th tranche of aid from the existing bail-out following Greece’s lack of adherence to the terms of the original agreement.

The Euro accordingly had a busy opening with Eurodollar still near its 4 week high.

Although it does appear that the worst is over in relation to Eurozone scare stories, it is doubtful that the Euro is a good buy at these heightened levels.

If the report concerning the IMF is correct and if comments about a further funding requirement for Ireland become more wide-spread, expect to see the Euro head south.

At present however, risk appetite is again on the rise with equities and commodities in demand and bond spreads closing slightly.

Risk appetite took a step backwards and the euro dipped in thin trading and with Europe re-joining the fray (although not with any real commitment as yet) it doesn’t appear that sentiment regarding money markets like currencies, interest rates or sovereign debt issues has changed one iota.
Trading sessions in the days around the weekend were light in volume and low in movement with thin US markets almost totally on their own for long periods.

We did see commodities and equities ease as a result of a decision from a major futures exchange to increase the margin for trading silver prompting a wave of profit taking in both silver and gold.

This then filter through to forex trading and, coupled with a comment from ECB President Trichet who said that maintaining a strong Dollar was in the US interest, caused the Greenback to make a bit of a recovery.

Last Friday’s data from the US was on the slightly weaker side of ‘as expected’ with new home sales roughly in line but the Dallas Fed manufacturing index marginally softer.

With the escalation of tensions in the Middle East / North Africa region now encompassing Syria, the Euro has headed back to its last week’s highs, with the Dollar again recording fresh lows against the Swiss Franc as oil once again turns higher.

We are scheduled to get several risk events this week that will test the market’s resolve on its bearish stance for the Dollar.

The first of these is the FOMC rate announcement tomorrow afternoon but more important will be the press conference that follows.

Despite growing concern that 1st Qtr GDP in the US will emerge as softer than originally hoped, expectation is that Ben Bernanke will send a clear signal to the market that the current tranche of QE, scheduled to end in June, will finish as planned.

There is currently no reflection of tightening monetary conditions in the forex market so, dependent upon the tone of the Chairman’s comments tomorrow, there appears good potential for a stronger Dollar going forward.

As US corporate results continuing to surprise on the positive side the wise money is increasing their investment risk profiles. The Dollar accordingly came under renewed pressure with investors again off-loading the Greenback to invest in equities and commodities as well as in the commodity based currencies.

This latter strategy is especially attractive at present with these currencies currently offering a big pick up in yield when compared to that of the US currency.

So, the Aussie reached a post-floatation high at 1.0775 and with the Dollar index hitting a 3-year low, both the Euro and Sterling touched 16-month highs at 1.4640 and 1.6517 respectively.

Gold was up again and USD/CHF hit an all time low.

One can argue that with ongoing developments in the Eurozone debt market and continued evidence of economic recovery in the US that the spot market has got it wrong but that would be a bit like King Canute trying to turn back the tide.

Go with the flow but watch carefully for the turn in sentiment.

Back to Europe. The 2 debt offerings, from Spain and Portugal were better received than had been feared with the former successfully auctioning 10 and 13-year bonds, admittedly needing to pay a higher yield but on the positive side, garnering better coverage than at the last similar offering.

Portugal also achieved its desired cash raising, via a 3 and 6-month bill sale, but in this case, not only was demand down but the yield demanded was higher than the last, pre-bail-out, rate.

This doesn’t make any real sense and obviously indicates the market’s trepidation over the future path of the country’s financial well-being.

With a further escalation of fears of a Greek debt restructuring as well as concern over the Irish demands for a renegotiation of the terms of its own bail out, the correlation between bond yields of the Eurozone constituent states was become fractured.

Yields on 10-year bonds issued by Greece, Ireland and Portugal are respectively 15%, 10.5% and 9.3% compared to the yield on 10-year German bunds of 3.3%.

If the market’s perception was that the current problems were containable then spreads of this magnitude would not exist. Numbers say more than words ever can…..

Standard & Poor’s cut the outlook on US sovereign debt for the first time ever from stable to negative although retaining the current ratings at their highest possible levels of AAA and A-1+. The adjustment was explained as being a warning to the US that its constantly swelling debt pile was unsustainable and that corrective measures would need to be introduced immediately.

The negative outlook implies that if nothing changes in the next 2 – 2 1/2 years, then an actual downgrade has a 1 in 3 chance of being triggered.

It is by no means certain that this will occur, but should shake up opposing US politicians enough to start the remedial action moving forward.

Suffice to say, the announcement provoked a flight from risk.

Equities fell, bond yields rose, commodities came off and with them, the commodity based currencies such as the AUD and CAD.

Gold and silver both rose, as did the Swiss Franc and oddly, the US Dollar.

The news is now old and largely irrelevant to today’s trading so we are back to the factors that were affecting the market yesterday morning – Eurozone debt issues, the Libyan situation and Chinese economic policy.

We are still getting mixed messages concerning a possible Greek debt restructuring with Jurgen Stark, an ECB Executive Board member commenting that debt restructuring is a very costly process and that it creates more problems than it solves.

An EU source stated that Greece had accepted that a ‘mild’ restructuring of its debt was unavoidable.

ECB President, Trichet, when asked about the subject this morning, fended off the questions saying that Greece should concentrate on applying the aid plan.

Market participants however, remain firmly in the ‘glass half empty’ camp waiting for confirmation of some degree of debt adjustment.

Greece are attempting to raise just over €1 billion today via a short term bill auction and the outcome of the sale will be crucial to market thinking going forward and bond yields are telling the story.

The Euro remains vulnerable to developments from the Greek situation.

The future path for UK interest rates is still very unclear even with the benefit of the minutes from this month’s MPC meeting. Despite the fact that members Sentance and Weale were joined by Spencer Dale in arguing for an immediate rise in interest rate, the majority of the committee remained unconvinced and in Posen’s case, still adamantly opposed to such a move.

This left the vote at 6-3 against an increase and despite renewed news warning about imminent and repeated rate rises, it is going to take a real change in sentiment from 2 of the 5 ‘steady as she goes’ voters to trigger a rise.

Wise Money finds it difficult to believe that this can occur until the committee has seen further evidence that the UK economic pick up has not been brought to a shuddering halt.

This feasibly, is unlikely to be the situation until towards the end of April when we and the MPC will get first sight of the preliminary 1st Qtr GDP data for 2011, a week prior to the May rate setting meeting which itself takes place a week prior to the release of the Bank of England’s May Quarterly Inflation Report.

It does look to me as though this meeting will be the first possible for a move in rates and the forex market seems to be of the same opinion with Sterling, having risen sharply yesterday morning, slipping against all the major currencies. Sterling is likely to remain vulnerable.

The crisis in Libya is still causing concern for commodities, equities and the world in general.

The little news that is emerging is very worrying with the escalating unrest disrupting oil supplies as civil war looms.

Oil prices have rocketed despite the fact that any shortfall in supply could be easily covered by Saudi Arabia.

The move looks more to do with fears that the problems will persist for some time yet and might spread further across the region.

For a third straight day the price of crude oil has continued to climb on production fears at the twelfth largest OPEC producer. The price of Brent crude oil has hit $111 a barrel, and US crude also rose in price, as worries persist about the unrest in Libya.

Markets are concerned the trouble could worsen in key oil producing countries, affecting supplies and hitting growth.

The price of Brent rose more than $5 a barrel, to $111.25 as US light sweet crude oil prices hit $100 a barrel for the first time since October 2008, before settling up 2.8% at $98.10 a barrel.

It comes as the White House said it was watching oil prices.

“We are obviously monitoring this very carefully and we are concerned about it,” White House spokesman Jay Carney said.

The markets have been gripped by uncertainty this week as investors tried to work out the possible impact of the Libyan violence on oil supplies.

With foreign oil companies suspending production, experts pointed out that the state-owned National Oil Company has run Libya’s oil fields before and could do so again.

It did so in the 1980s when US oil firms left the country – but production would be hampered without the input of experienced of foreign oil companies- who are repatriating their staff to safety.

Oil prices have continued to rise in the UK and US after ongoing riots in Libya and worries about the impact on the country’s crude exports.
In London Brent crude rose by more than $2 a barrel to $108.5, before falling back to $106.79 a barrel.

In New York, US light sweet crude oil rose by $5.60 to $91.80 a barrel.

US shares were also behind at midday. Asian stocks had closed down, and European shares also fell before recovering by mid-afternoon.

At noon in New York, the Nasdaq was behind by 1.65%, the Dow by 0.76%, and the S&P 500 by 1.11%.

At close France’s Cac 40 had fallen by 1.15%, Germany’s Dax by 0.05%, and the London FTSE by 0.30%.

Meanwhile, Spanish oil firm Repsol-YFP was joined by Italy’s Eni in closing down production in Libya.

On Tuesday, the Standard & Poor’s (S&P) credit rating agency downgraded Libya from A- to BBB+, and said it could lower the rating further.

Libya is the world’s 12th-largest exporter of oil, and there are concerns that growing tensions in the country could hit oil production.

Spillover into other big regional producers, such as Saudi Arabia and Kuwait, is another concern that is forcing up the price of oil.

Global oil companies have been pulling staff out of Libya as unrest continues to spread.

The rising price of oil, which could fuel further rises in already high inflation rates and hit corporate profits, affected stock markets in Asia and Europe.

Unrest in the region could spark a wider correction in stock markets, analysts said.