Markets slide as Greece scares investors

Stock markets fell yesterday as fear of contagion from Greece’s debt disaster combined with depressing US economic data to send share prices down.
The FTSE 100 slid 1.2 per cent to close down by 64.70 points at 5,278.22 amid fears that Greece’s problems could derail the already-fragile economic recovery. The CAC 40 in Paris fell even further, down 2 per cent, while Germany’s DAX was off more than 1.5 per cent.
Standard & Poor's warned on Wednesday night that it may slash Greece’s credit rating to close to junk within a month, despite new austerity measures designed to cut the country’s budget deficit.
The European Commission’s decision yesterday to revise down growth forecasts for Britain alone did nothing to calm shareholders’ nerves. The commission said that UK gross domestic product (GDP) was likely to increase by 0.6 per cent this year, rather than 0.9 per cent. 

 

However, prospects for the rest of Europe were not much brighter. The forecasts showed that economic growth across the Continent would be uncertain and dwarfed by emerging Asian rivals this year.
America’s main stock markets lost well over 1 per cent in early trading, with the Dow Jones industrial average shedding almost 174 points before recovering to close down 0.51 per cent at 10,321.03.
The US Labor Department’s tally of new claims for unemployment benefits also depressed investor sentiment. It said that new dole claims rose by 22,000 to a seasonally adjusted 496,000 people in the week to February 20. Economists had expected claims to fall to 455,000.
In his second day of testimony to a congressional committee, Ben Bernanke, the chairman of the Federal Reserve, cautioned against “over-interpreting” the jobs data, which he said may have been skewed by a backlog of claims caused by recent winter storms.
Mr Bernanke also said that the Fed was investigating the role played by Goldman Sachs and other Wall Street companies in Greece’s debt dilemma. 

 

American banks entered into currency swaps with Greece almost ten years ago that allowed the country to postpone recognising its debt.
“Using these instruments in a way that potentially destabilises a company or a country is counterproductive,” the Fed chairman said. “We’ll certainly be evaluating what we learn from the activities of the holding companies that we supervise here.”

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US to maintain low loans interest rates

Not a surprise but the markets appreciated the confirmation from the FED which removes any potential near term surprises from the Fed. 

Equities picked up on the news but risk appetitie is far from returning. Europe came back to the fore and this morning the markets are in a tailspin of fear again as the threat of a sovereign downgrade looms over Greece. 

This opens up the possibilty of Grrek bonds being illegible with the ECB, making it more difficult to borrow.

The Yen is flying in the markets today and has pushed below 89.50 against the USD and pushed GBP down to 136.82 as we stand. The Yen is being favoured as a safe haven after recent strong economic data; the USD has also experienced gains again today with EUR/USD dropping as low as 1.3449 and GBP/USD to 1.5270 a new 9 month. 

Big day tomorrow for sterling in the revision of the Q4 2009 GDP- it is expected that it will be revised up to 0.2% from 0.1%- we need as expected or better to stave off further sterling selling. 

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US consumer confidence remains fragile

Yesterdays US consumer confidence data came in weaker than expected and highlights the delicate recovery phase for the US economy. 

This also backs up recent dovish comments from the Fed asserting that interest rates will need to remain low for a prolonged period and that liquidity withdrawal may not be a foregone conclusion. The data helped to spook the markets and strengthened the natural safe havens of the JPY and USD. 

The Yen was also lifted on good export data pushing GBP/JPY back below 140.00 and USD/JPY down to 90.00. 

At the moment for recovery we have an east and west divide with robust recovery coming from China, Malaysia, Honk Kong contrasting the jitters in Europe, the UK and the US. The tide has shifted.

The Greece debacle is still ongoing and Fitch downgraded the 4 largest banks to BBB with a negative outlook to boot. The situation was not helped by a German lawmaker of the ruling conservative party commenting that Germany must ensure that it does not pay for Greece as it could trigger the demand for more aid. 

In addition the Czech finance minister said that the Greek pledge to cut the deficit to 3% in 3 years is "nonsense" in his view. 

So some lively times ahead.

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Wise Money forsees a volatile week ahead

It’s a big week for the currency markets with a number of events that will most certainly add to the already volatile conditions which we saw in January.

The Euro has continued to slide against the Dollar over the weekend as concerns that Greece's budget problems may spread continue to weigh on the single currency. 

Recent data from the Commodity Futures Trading Commission has shown that bets on a further decline now stand at the highest level in over a year. A strong Q4 US GDP figure (and subsequent stock market gains) on Friday further supported the dollar positive sentiment and helped the greenback reach a four-month high against the Swiss franc and a three-week high against sterling as signs the world's largest economy is gaining momentum spurred investors to buy U.S. assets. 

Reports due later today are also expected to show that show U.S. manufacturing expanded for a sixth month and household purchases rose.

In the UK, attention this week will focus squarely on the Bank of England's policy decision on Thursday and what this will mean for the future of the asset-purchase facility. 

With the property market showing signs of strengthening and the economy exiting recession, the MPC may move towards pausing it's emergency bond purchases after buying 200 billion pounds so far.

UK data earlier this morning showed that house prices rose for a sixth month in January as a shortage of homes for sale supported property values. However, prices were still down 0.8% from a year earlier.

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GDP economic data for UK and US awaited

The lull before the storm? There is little economic data today, therefore the markets will be left to their own devices for the next couple of trading sessions. 

Having said that, the Far East continued Friday’s trend in equities to finish lower on the session. Wall Street traders were spooked somewhat by the seemingly ever-more frantic measures that Obama is promoting to try and revive his flagging popularity and news that Bernanke’s re-election for a further term was in doubt just left any bulls side-lined. 

The re-appointment of the dovish Ben Bernanke is seen as vital for the continuation of growth in the US economy going forward…..

At this stage in the week’s trading timetable then, we are very much looking forward to data and events later in the week. The headline catcher will be the release of updated GDP numbers from both the UK and the US with positive revisions expected for both. 

Although Alistair Darling has been down-playing expectations for the UK figure, the weekend press and market pundits have all (or mostly all) pencilled in a positive figure for the 4th Quarter (+0.3% giving a less negative annualised number of about -3.0%). 

This will no doubt be heralded as the first indication that the trough of UK economic performance has been passed and be greeted with great enthusiasm. The road to full recovery however will remain littered with potholes so expect any Sterling strength on the back of the news to be short-lived.

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US dollar weakens on news

A combination of factors has caused a weaker US Dollar this morning. 

Firstly the market is still reacting to the disappointing US non-farm payroll data on Friday; the expectation was for a positive number at +10,000, however the actual came in at -85,000 for the month of December. 

This data after volatile markets led to a weaker US Dollar. This morning the Pound and the euro have gained further against the greenback with sterling heading towards 1.62 and the euro pushing back over 1.45. 

The weekend release of December Chinese trade data which came in above expectations is helping lift risk sentiment in the markets. Chinese exports rose 17.7% in December helping to reinforce confidence in the global recovery and lifting FX risk flows. 

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Financial markets wind down for Christmas

Financial markets get more and more illiquid and technicals become more and more relevant. 

To that end, Euro/Dollar remains the driver for forex markets and the target is very much the 200 day moving average level of just below 1.4200. 

Given the current penchant for buying Dollars, this looks a better than evens bet today. The turn in the dollar to date comes from a better relative economic performance than other majors, rather than any concern that the global recovery will derailed. 

As such, we should not necessarily be seeing weakness in high yield commodity and emerging currencies. Certainly the renewed strength in the dollar may be discouraging funding carry trades out of the dollar, and renewing the case for funding out of the JPY or even the EUR, but it suggests a broad carry trade unwind is unlikely to last. 

The recent improvement in the US Dollar against other major currencies reflects the relative rise in US bond yields. 

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UK GDP data revision disappoints

The financial markets remain very illiquid and so reasonably volatile. 

Equities had a strong day with oil perking up ahead of expected positive revisions to today’s GDP numbers from the US and the UK. 

In fact the UK GDP came in lower than forecast at -0.2%. This disappointed the markets and sterling fell against the major currencies and briefly dipped under the key 1.60 level against the USD.

The US figure should not be much different from the previous estimate of +2.8% leaving the afternoon session very subdued.

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US Dollar bounces on employment figures

The surprise US non farms payrolls that came out on Friday took centre stage. 

A reading of -125k was expected but the actual data came out at -11k. This shook the markets, giving the US Dollar a boost as investors scrambled out of most majors including JPY, GBP and EUR positions. JPY weakened by 2.4 cents, GBP fell 2.5 cents on the day and EUR fell by 2.7 cents. 

The far better than expected payrolls reading showed that US employers cut the fewest jobs in November since the recession began; this positive reading surprised the market and is a strong recovery sign. However, a large portion of the better than expected reading is attributed to the seasonal temporary increases in staff over the holiday period. 

It is not surprising that there is such a strong influx in temporary staff numbers as many companies have aggressively cut their permanent staff in order to cut costs.

The headline payrolls data overshadowed the unemployment rate which came out at 10.0%, whilst this an improvement on last month’s reading (of 10.2%) it is still an ongoing concern to US recovery (the last time unemployment was this high was back in 1983).

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US unemployment rate hits 26 year high

America's unemployment rate hit a 26 year high of 9.7 per cent after companies cut 216,000 jobs in August.

The Labor Department also revised job losses for June and July, increasing by 49,000 the number of jobs lost in those months.

The job cuts in August were not as severe as the 225,000 cuts expected by economists. In fact, it was the lowest number of monthly job cuts in a year. 

The Dow Jones industrial average rose 29.32 points to 9,373.93 while in London the FTSE 100 index added 64.91 points to 4,861.67.

But, the unemployment rate, which dipped to 9.4 per cent in July, ratcheted up because 73,000 workers who had previously given up looking for jobs started hunting for employment again, increasing the potential labour force.

US unemployment is expected to hit 10 per cent by the end of the year. The country has lost about 6.9 million jobs since the recession started in December 2007 and there are now 14.9 million unemployed Americans.

However, the August report confirmed the pace of cuts was easing from early this year, when nearly three quarters of a million jobs were lost in January.

The Federal Reserve warned on Wednesday that the job market was still "poor" and companies would remain cautious about putting on workers despite increasing signs of an economic recovery. 

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Wise Money asks if the good cheer will prevail?

On Friday we had further positive feedback from the US economy as existing home sales came in much better than forecast hitting 2 year highs.

This data and a healthy economic assessment from Ben Bernanke boosted the good cheer in the markets. We are approaching the one year mark from the collapse in the financial systems and at the moment things are looking pretty steady and stable.

However I feel economic data will be closely scrutinized in the next quarter to look for sustainability in the markets and not simply a knee jerk response to extra stimulus.

An article in the FT by Nouriel Roubini points to a threat of a double dip recession if the recovery turns anaemic.

Chin up to you Aussie readers- yes you have lost the Ashes and also the rugby against rivals New Zealand over the weekend. However do not despair as your currency is strong- hitting new 12 year highs against sterling at 1.9608.

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US housing starts surprise with July fall

New York stocks rise as better than expected results from retailer Home Depot offset the surprise drop in housing starts

US housing starts and permits fell unexpectedly in July, as hopes for a boost from falling house prices and government stimulus efforts for first-time buyers proved over-optimistic.

Privately owned housing starts fell 1 per cent to a seasonally adjusted annual rate of 581,000 units. This was well below market expectations for 600,000 units and significantly less than the revised 587,000 unit figure for June, according to figures from the US Commerce Department. Compared to July last year, housing starts dropped 37.7 per cent.

Construction starts for single family homes, the worst hit part of the housing market, rose 1.7 per cent to an annual rate of 490,000 units, the highest since October. But the headline figure was dragged down by a 13.3 per cent fall in starts on multi-family units.

New building permits, which give a sense of future home construction, fell 1.8 percent to 560,000 units in July. Analysts had been expecting 580,000 units. Compared to the same period a year-ago, building permits declined 39.4 per cent. This was despite the $8,000 Federal government tax credit stimulus efforts introduced for first-time buyers.

The inventory of total houses under construction fell to record low 609,000 in July, the department said, while the total number of permits authorised but not yet started also hit a record low at 102,300.

US stocks rose in morning trade as the surprise drop in housing starts was offset by better-than-expected results from retailer Home Depot. The Dow Jones industrial average was up 63.63 points, or 0.70 per cent, at 9,198.97.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US payroll numbers boost the US Dolllar

On Friday we saw the much anticipated US non farm payroll numbers come in far ahead of expectations.

The number of job losses in July came in at -240,000 against a forecast of -325,000. This was a huge lift for the markets and the US economy following 19 months of dire payroll numbers.

As anticipated the Dow and the FTSE rallied on the news as investor optimism increased; however in the currency markets we did not see the typical play into risk appetite trading and USD weakness.

Initially we did see the USD weaken against the Euro and the Pound, however this weakness was short lived and the USD rallied back considerable across the markets.

So what does this mean? Well it could mean a change in sentiment for the US economy whereby it no longer weakens on good news- the key driver for this is the anticipation that the Federal Reserve may now look to raise interest rates sooner than other major economies and is better placed to do so.

The economic data also helped to comfort the markets to viewing that the Fed will not look to expand (like the UK) its current measures on QE and ultimately that the economy is out of the deep water it was once in. It is still early days but a very good number nonetheless and could mark a turning point. GBP/USD filtered down to 1.66 and EUR/USD down to 1.4155.

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Sterling tops out at 1.65 again against US Dollar

In the last few weeks we have seen a number of attempts to breach 1.65 on GBP/USD and every time the market has failed to hold above this level.

A similar pattern has emerged in USD/JPY which has struggled to hold over 95. In the last four trading days we have seen a tight trading range for GBP/USD which is unusual in the light of the volatility in the last few months.

Today we have a few data snaps in the calendar for the UK which could shake the markets back into life. We have UK mortgage approvals, consumer credit, net lending and M4 money supply out this morning.

Yesterday the USD strengthened against the pound from over 1.65 back to 1.6350 and from 1.4280 down to 1.4108 against the euro. US stock markets fell more than 1% and this helped swing money back into the USD. US economic data supported the trend into risk aversion as consumer confidence fell from 49.3 to 46.6, the lowest level in 3 months.

The S&P/Case-Shiller home price index fell 17.1% in May- this is the main measure of US house price movements. In addition US corporate earnings were shaky and Bank of America announced that they will be shutting 10% of branches signaling further lay offs.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FTSE 100 eyes eleventh day of gains

The FTSE 100 headed into its eleventh consecutive day of gains in early trading in Monday.

The benchmark index chalked up its longest winning streak since January 2004 on Friday, after rising for ten straight days.

In early trading on Monday, the index of blue-chip shares was up 16 points, or 0.4pc, remaining just below the 4,600 mark.

Shares in Britain are emulating gains around the world, with the Dow Jones index in the US climbing above 9,000 points for the first time since January last week, and the Nikkei 225 Stock Average recording its best run of gains since 1988.

US companies have reported better-than-expected earnings in recent weeks, surprising investors and triggering more buying. feet.

Some Wall Street banks have also reported bumper profits, boosting confidence in the financial sector which was behind much of last year's market decline.

Leading the gains on the FTSE were Financial Times publisher Pearson, which was up 7.6pc to 652p after reporting a first-half profit, and mining companies Lonmin, up 4.6pc to 1,300p and Antofagasto up 3.9pc.

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FTSE 100 heads for sixth rise in a row

London shares climbed in early trade on Monday, on course to rise for the sixth straight day, tracking gains in Asia as a last-minute $3bn (£1.8bn) rescue of US CIT Group lifted sentiment.

By 0811 GMT the FTSE 100 rose 36.79 points, or 0.8pc at 4,425.54, after posting its best weekly rise since early January on Friday.

UK stocks were lifted after shares in Asia rose to a 10-month high, the best performance since the collapse of Lehman Brothers, as strong U.S. corporate earnings spurred optimism about the pace of global economic recovery.

Banks were the biggest gainers on the UK index, with Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland rising between 1.2pc and 5.9pc.

The market also drew support from data from property website Rightmove showing that the falls in property prices in England and Wales over the past year may have bottomed out.

Miners were higher as metals prices benefitted from the prospect of a global recovery. Anglo American, BHP Billiton, Eurasian Natural Resources Corp, Kazakhmys, Rio Tinto and Xstrata were up between 0.6pc and 3pc.

Friends Provident gained 1.5pc after financial buyout firm Resolution sweetened its proposed offer for the insurer, including a cash element and a commitment on dividends.

Defensive stocks fell out of favour, with tobacco firms British American Tobacco and Imperial Tobacco down 0.7pc and 0.5pc respectively. Food retailers were also lower, led by a 0.5pc fall in British supermarket Tesco

Global markets were lifted by U.S. lender CIT Group's tentative deal with bondholders for $3 billion in rescue financing, a move which would prevent the firm becoming the latest casualty in the financial crisis.

Further positive news on the global economy came as a survey released on Monday by a group of economists found that the recession in the US appeared to be easing but had probably not yet ended.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wall ST slides ahead of earnings season

US stocks fell to their lowest levels in two months on Tuesday as investors sold shares ahead of the start of the second quarter earnings season.

Confidence in the economic recovery was knocked by talk of a potential second government stimulus plan after Laura Tyson, an economic adviser to president Barack Obama, and House Democratic leader Steny Hoyer both suggested there could be merits to such a package.

Economic fears and a strong dollar took its toll on commodities, with the price of oil falling for a fifth consecutive session.

Energy producers followed, and Schlumberger dropped 4.4 per cent to $49.20 while Exxon Mobil lost 2.3 per cent to $66.56.

Industrial stocks also suffered, and General Electric gave up 4.1 per cent to $11.01.

The benchmark S&P 500 closed down 2 per cent at 881.03, while the Dow Jones Industrial Average lost 1.9 per cent to 8,163.60 and the Nasdaq Composite gave up 2.3 per cent to 1,746.17.

That came after sharp selling in the afternoon as the S&P fell below its 200-day moving average, which is seen as a key support level.

Analysts predicted that the market would remain subdued at least until Thursday, after Alcoa has reported its results.

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US banks close as private equity evaporates

Seven banks were closed by the American banking regulator in one day last week.

The banks, including six in Illinois, were brought down by plunging property prices, bad loans and high-risk investments.

The bill to the Federal Deposit Insurance Corporation (FDIC), the country’s $49 billion bank deposit guarantor, for this round of failed banks was expected to hit $314.4 million (£194.4 million).

Coming on top of 46 collapses already this year, last Thursday’s failures — the most seen in a single day during the financial crisis — added a touch of urgency to the FDIC’s problem: how to offload these liabilities while not increasing the risks to its fund. “We want non-traditional investors,” Sheila Bair, the FDIC’s chairman, explained. “There is a significant need for capital and there is capital out there.”

The FDIC is funded by the banking sector and returns from its investment in US Treasury bonds. When a bank fails, the corporation protects customers’ deposits, usually up to the value of $250,000.

America’s recession has caused the number of bank collapses to rise steeply, increasing the FDIC’s interest in selling some banks to avoid pressure on its funds.

At the same time, the most likely buyers, from the private equity industry, have their own problems. According to Preqin, the data provider, private equity funds were sitting on a $1 trillion war chest at the beginning of the year — but they are unable to do the highly leveraged deals that they favour because banks are no longer offering big loans for buyouts.

So far, attempts by the FDIC to sell failed banks to private equity groups have been mixed. It sold IndyMac Federal Bank, of California, in January for $13.9 billion to a group of investors that included George Soros, Christopher Flowers and Michael Dell, the founder of Dell.

In May a consortium including Carlyle Group paid $945 million for Florida’s BankUnited Financial, which came with a guarantee that the FDIC would take most of the future losses from the bank’s existing books of business.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US stocks slide on jobs report

US stocks finish a shortened week on a disappointing note on Thursday morning as data showed many more people lost their jobs during June than expected.

A total of 467,000 non-farm employees lost their jobs during last month, 100,000 more than had been expected. However investors took some confidence from the fact that the unemployment rate rose only a notch to 9.5 per cent, its highest since 1983.

Meanwhile 614,000 people claimed jobless benefits for the first time last week, a number that is seen as a more current indicator of the state of unemployment than the figures for June. This was slightly lower than expectations, as was the number continuing to claim such benefits.

Banks, which had been trading lower throughout the morning as investors moved to anticipate the figures, extended their declines. Citigroup fell 1 per cent to $2.94 and Wells Fargo gave up 1.2 per cent to $23.85.

Despite the economic data, trading is thin, with many investors having taken an early break before the long Independence Day weekend.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money lifted by jobs data

Markets climed higher in early US trades as the latest report on jobless claims turned out to be better than expected and retail sales improved.

The Dow Jones was up 62.13 points at 8,801.15 at midday in New York, the S&P 500 was up 8.57 at 947.72, and the Nasdaq was up 11.48 at 1,864.56.

A Labor Department report showed first-time jobless benefits claimants fell to 601,000, better than expectations. The Commerce Department said retail sales increased 0.5 per cent in May after two months of declines.

The FTSE 100 index closed up just 25.12 points higher at 4,461.87 as banking sector gains were offset by falls in commodities.

Oil companies retreated after recent gains, despite oil prices rising for a third day, above $72 a barrel and hitting an eight-month high in New York on the back of a larger-than-expected drop in US crude inventories.

Findings from the National Institute of Economic and Social Research (NIESR), the leading economic think-tank, that the UK economy could emerge from recession soon gave strength to the pound.

Sterling climbed to its highest level in more than six months to reach €1.174 compared with €1.167 previously.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US banks to pay back $68bn in rescue funds

Hopes of a return to stability in the bombed out banking sector were raised by plans for ten banks to repay their loans.

Ten bailed-out US banks have been cleared to pay back a combined $68 billion (£41 billion) of government aid in a move greeted by investors as a sign that stability is returning to the sector.

The Treasury said that it had told ten institutions that they had raised enough new capital to enable them to repay loans made under the Troubled Asset Relief Program (Tarp).

Several banks, including JP Morgan Chase, Capital One Financial, Morgan Stanley and BB&T Corporation, immediately announced that they would take up the offer.

JPMorgan said that it would repay in full a $25 billion investment along with dividends. Jamie Dimon, the group’s chairman and chief executive, said: “Paying back Tarp at this time is the right thing for JPMorgan Chase, and it’s the right thing for our country.”

Morgan Stanley said that it was “pleased” to pay back $10 billion.

Kelly King, the chief executive of BB&T, said that the group would repay $3.134 billion. “Repaying the government’s investment will give us greater flexibility to benefit significantly from future opportunities that will be available as we emerge from this recession,” he said.

The others said to have been cleared were Goldman Sachs, Bank of New York Mellon, Northern Trust, State Street, American Express and US Bancorp. Many of the banks had winced at the restrictions accompanying the bailout funds, such as limits on executive pay.

The Treasury said in a statement that the repayments “follow a period in which many banks have successfully raised equity capital from private investors”. Timothy Geithner, the Treasury Secretary, said: “These repayments are an encouraging sign of financial repair but we still have work to do.”

US shares were flat on the news as investors fear that an oversupply of government debt could push interest rates higher. The Dow Jones industrial average inched up by 1.43 points or 0.02 per cent to 8,763.06.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Gloomy data weighs on wise money

Bernanke warns that America must curb its budget deficit

Gloomy housing sector data and continued layoffs led to a subdued Wall Street opening as investors played safe with their profits after a succession of session gains.

Investors were also reacting to a warning from Federal Reserve chairman Ben Bernanke that Congress and the Obama administration must start plotting a strategy to curb record-high US budget deficits.

Failing to do so could eventually erode investor confidence and endanger the economy’s prospects for long-term health, he said.

Testifying before the House Budget Committee, Mr Bernanle said: “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year. That would be more than four times last year’s all time high.

A survey by ADP, a payroll business, revealed that the US private sector shed 532,000 jobs in May - better than 545,000 in April but slightly higher than the 525,000 estimated.

In the UK, the pound gained strength on the release of data indicating a return to growth for the services sector.

The euro recovered slightly from a six-month low against the UK currency and the dollar continued its weak trend, but improved from a morning low to trade at $1.643.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling hits six month high against the dollar

Sterling reached its highest level against the dollar in more than six months as it took strength from an improved outlook for the global economy.

The UK currency closed at $1.6155 having earlier reached $1.6183 - on track for its biggest monthly gain since 1985.

Positive economic news from Japan and Germany, sent the dollar tumbling against a basket of currencies.

US stocks traded mainly flat after enjoying a promising start to the session with the release of data from the US Government which indicated that the recession could be on the turn.

Further data dampened earlier optimism with the Institute of Supply Management Chicago showed US midwest business activity slowing severely in May. Another survey showed consumer confidence in May was at its highest level since last September.

Government figures had earlier revealed that the US economy contracted slightly less than estimated in the first quarter. Corporate profits rebounded.

Gross domestic product, or total goods and services output within the US, dropped at a 5.7 per cent annual rate, the Commerce Department said, less than last month's 6.1 per cent government estimate. The economy contracted by 6.3 per cent in the fourth quarter.

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Bond markets defy Fed as Treasury yields spike

The US Federal Reserve may soon be forced to launch fresh blitz of quantitative easing whatever the consequences for the US dollar, or risk seeing economic recovery snuffed out by the latest surge in long term borrowing costs.

Yields on 10 year Treasury bonds have risen relentlessly since March when the FED first announced its plan to buy $300bn (£188bn) of US government debt directly, a move that briefly forced rates down to nearly 2.5pc, a level thought to be the Fed's implicit target.

The US Mortgage Bankers Association yesterday highlighted the fragility of the US housing market, reporting that 12pc of homeowners are either behind on their payments or facing foreclosure, the highest level since records began.

Almost 6pc of "prime" borrowers are in arrears, showing how far the crisis has moved beyond the sub-prime. Most arrears are caused by job losses. The US unemployment rate has reached 8.1pc, and is even higher under older definitions, running at 15.8pc under Clinton-era metrics.

It is unclear why US bond yields have spiked so violently, with spill-over effects on gilts and bunds. One camp of investors is worried that inflation is rearing its ugly head again: others fear a sovereign debt crisis as over-extended states loses their AAA ratings.

The US is at the front of the firing line. Beijing is clearly losing its patience with the Fed's policy of printing paper, seen as a form of stealth default. There is some risk that further moves to step up quantitative easing could cause China to boycott US Treasury auctions. China and Japan together hold 23pc of all US federal debt.

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Asian shares founder after North Korean nuclear test

Asian stocks foundered on Tuesday as the United Nations condemned North Korea's nuclear test and investors awaited more clues about the health of the world economy.

Major markets like Japan and South Korea drifted lower, while the dollar fell against the yen and oil prices slackened.

Tensions on the Korean Peninsula showed no signs of easing after the UN Security Council criticized North Korea's test of a nuclear bomb as a "clear violation" of international bans. But the country's defiance continued with reports saying it would likely step up its weapons testing by firing short-range missiles this week.

While hurting sentiment in the short term, the standoff was more an excuse to take a breather from the recent rally, analyst said.

Caution ahead of upcoming economic reports in the US, as well as Wall Street and British market holidays Monday, also left investors with few reasons to set a course one way or the other.

Japan's Nikkei 225 stock average fell 19 points, or 0.2pc, to 9,327.82, while Hong Kong's Hang Seng rose 19.91 points, or 0.1pc, to 17,141.73 in an erratic session.

In South Korea, the Kospi was off 2.4pc at 1,367.02. The benchmark dived over 6pc on Monday on news of North Korea's nuclear test before recovering nearly all its losses.

Elsewhere, Shanghai's index lost 0.1pc, Australia's benchmark was up 1.1pc and Taiwan's market dropped 0.8pc.

Both US and British financial markets were closed Monday for holidays. European markets finished little changed on Monday.

With investors eyeing key US economic reports this week, including home sales, big-ticket manufactured goods and consumer confidence, Wall Street futures pointed to a slightly lower open on Tuesday.

Oil prices fell Asia trade ahead of OPEC's meeting this week, with benchmark crude for July delivery trading at $60.93 a barrel, down 74 cents from overnight trade.

The dollar slipped to 94.66 yen from 94.84 yen, while the euro was lower at $1.3976 compared to $1.4003.

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Wise money markets remain mixed

The good news- UK PMI has risen to 42.9 in April from 39.5 in March, above market expectations of a reading around 40.5.

Also in the UK- net consumer lending has been released to have hit its lowest level on record in March, totalling GBP0.9 billion, from 1.5 billion in Feb.

The Pound has risen on the back of better than expected UK manufacturing PMI, and lowest Net consumer lending on record; Sterling is also on the up against the euro and the Yen since the release- the key levels for sterling to target are 1.5065 on the USD and 1.13 on the euro.

Yesterday's US data was a little mixed which was reflected in the Dollar's performance. The afternoon ended on a high note with the release of a much better than expected Chicago PMI index which showed that new orders were at their highest level for 6-months.

Following a running down of inventories there is showing a need for re-stocking but one must assume that this purchasing would not occur unless there was strong optimism that demand was returning. This bodes well for this afternoon's US ISM result.

The ISM survey is good at reflecting turning points in economic direction and once the indicator picks up, it typically continues to climb steadily. Given this pattern and added to the strength seen in recent regional surveys, the market is looking for a rise to 38.2 from last month's 36.3.

In other news, Mexico’s peso fell for the first time in three days after Finance Minister Carstens said the economy will drop for the next few months, reviving concerns the swine-flu outbreak will deepen a slump. The peso declined 0.9 percent to 13.8407 per U.S. dollar yesterday and the drop was the biggest among the six most-traded Latin American currencies.

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Stock markets in Asia remain under pressure

Stock markets in Asia, already buffetted by concern over an outbreak of swine flu, remained under pressure after a report that Citigroup and Bank of America will need billions of dollars of new capital.

The Wall Street Journal reported today that US regulators have told Bank of America and Citigroup that early results of the stress tests show they may need to raise billions of dollars in new capital. Banks across Asia fell, with National Australia Bank declining 3pc.

“You’d think that most banks could pass the stress tests, but if even these two fail, what it tells investors is that the situation could get much worse,” Chris Leung, a portfolio manager at Taifook Asset Management in Hong Kong, which oversees $500m, told Bloomberg.

Elsewhere, Ping An Insurance, China’s second-largest insurer, sank 9pc after reporting a drop in profits. JFE Holdings, Japan’s second-biggest steelmaker, fell 5.4pc after US Steel reported a bigger-than-expected loss.

Fears of a swine flu pandemic produced a rollercoaster day on global markets yesterday, triggering a sell-off in airline, hotel and holiday company shares. However, shares in pharmaceutical companies remained in demand.

In Tokyo, Chugai Pharmaceutical, which sells the antiviral drug Tamiflu, rose for a second day in Tokyo on speculation a swine flu outbreak will boost drug sales.

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Swine flu fears may hit airline and hotel shares

Travel and hotel groups are braced for a turbulent ride today as markets react to fears over the strain of swine flu that was reported to have killed up to 71 people and closed much of public life in Mexico at the weekend.

Analysts said that the news would revive memories of the 2002-03 severe acute respiratory syndrome (Sars) outbreak. Although the disease, first noticed in southern China in November 2002, was short-lived, it caused the deaths of 774 people worldwide and had a devastating impact on the Asian economy — particularly in Hong Kong — and on the shares of many international companies with an economic interest in the Far East.

In Asia, dealers said that any sell-off was likely to be in airline and travel-related stocks until more was known of the extent of the danger posed by the disease and its probable impact on global trade.

One dealer said that markets were likely to reassess their stance if more countries followed Russia’s decision yesterday to ban meat imports from Mexico, some parts of the United States and several South American countries.

Fund managers played down the risks of a swine flu-related sell-off, saying that Asian markets were used to the threat of potential health scares and were more cautious about moving too soon after reports of new disease strains.

Weekend reports in Tokyo suggested, however, that two of Japan’s biggest travel agencies had cancelled package tours to Mexico before Japan’s “Golden Week” holiday season, which begins on Wednesday.

Viewed by travel agents and airlines as the most lucrative seven days of the Japanese year, Golden Week travel activities by the Japanese are critical to many destinations that rely heavily on tourism income.

The mass cancellation of flights to Mexico will be a heavy blow to airlines, though travel agents said that it would be far more significant if Japanese holidaymakers cancelled flights to America as well.

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US economy facing substantial recessionary risks

The US economy is facing "substantial risks" as the property bust spreads to commercial real estate and the recession engulfs the world, a top White House adviser has said.

Larry Summers, chair of the National Economic Council, said there were signs that worst may be over but warned that "it is a long road and it is going to take time" after the damage inflicted on the financial system.

"There are downside contingencies that we've got to prepare for, issues in the global economy, in commercial real estate. We can't know with certainty what's going to happen next, and there certainly are real risks ahead," he said at the Americas summit in Trinidad.

US house building appears to be stabilising near 500,000 a month, albeit a very low level. The number of new jobless claims has dropped over the last two weeks.

Dominic Wilson, a strategist at Goldman Sachs, said: "There are few clearer signals than this that the market remains highly uncertain about the recovery path and the risks ahead"

Mr Wilson said one year VIX contracts have remained at elevated levels not seen since the Great Depression.

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The backlash over AIG bonuses risks inflicting permanent damage on Wall Street

The pitchfork wielding anti bonus mob stirred up by American International Group is making for lousy tax policy.

Outraged US legislators are pushing through punitive taxes on bonuses not just at AIG but at all recipients of government funds. The hot-headed and unfairly retroactive changes could hurt investor confidence, undermine President Barack Obama’s credibility and damage the still valuable US finance sector.

AIG has been especially irresponsible, both with its risk-taking during the credit boom and with its handling of its affairs since.

Agreeing to extra bonuses and then paying them to employees of its financial products unit after receiving $170bn-plus in government money – and failing to sufficiently forewarn Congress and others to boot – has rightly riled Americans and their elected representatives.

Plans to tax bonuses at financial institutions that have been bailed out by the US government are the knee-jerk result. The scheme passed on Thursday in the House would result in taxes of 90pc on bonuses at institutions that have received funds from the government; in the Senate, which now has to consider the measures, thinking seems to be 35pc levied on the employer, and an extra 35% on the employee.

The bonus tax idea is bad for a range of reasons that senators should consider calmly, even if the House didn't do so. One is that it changes the rules – again – for recipients of government assistance.

Government initiatives to kick-start clogged financial markets depend on investors and institutions participating. If they think that the rules of the game are going to change continually, they’ll be reluctant.

The tax plans are also retroactive to the beginning of this year. Bankers awarded bonuses for 2008 – and some payouts were both relatively modest and legitimately earned – received them earlier this year, net of prevailing taxes.

They may in good faith have spent the cash, invested it or even given it away. Changing the rules now, and demanding a giant additional tax cheque, really isn’t fair.

Even more importantly, there’s the longer-term impact on the US financial industry. Wall Street’s finest, together with AIG – admittedly a different beast – are now in the doghouse together.

But the finance business is in fact one of America’s global strengths. The planned taxes are just the kind of thing that will give foreign firms and non-US bankers an edge.

In fact, US institutions may be motivated to pay back funds received under the Treasury's Troubled Asset Relief Programme so as to escape the new taxes.

That sounds like a silver lining - except that administration officials don't want that yet, for fear that firms will lose the capital cushion against further losses that Tarp was designed to provide.

That's just one example of the crossed wires inherent in the latest tax plans. And with so many bigger issues at hand, it's surely the kind of risk to credibility that Congress should make sure it avoids.

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Fed shock the markets with a bumper $1.15 trillion stimulus plan

The Pound and the euro rallied significantly last night against the USD as the Federal Reserve shocked the market with a $1.15 trillion boost for the US economy.

This has caused the US dollar to be sold off and we have broken through 1.40 again as the equity markets rally. $300 billion will be made available for longer term treasury securities and $850 billion for the ailing Fannie Mae and Freddie Mac.

The FX markets witnessed big swings with EUR/USD rallying to 1.35 and USD/YEN moving back down to 95.

The market is now looking for safe haven currencies outside the US dollar as currency risk is dissipated. Sterling gained against the USD but remained subdued in other areas and weakened against the EUR with a break of 1.05 now in reach.

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US stocks bounce from the lows

Following dreadful US consumer confidence data earlier in the day the Dow posted a 2% rise, this after Bernanke testified to the Senate on the health of the US economy.

He again highlighted that the US economy still faces further contraction, however he intimated that the US government would not move to nationalize US banks as this would lose value already built into banks. On the back of this there was an expected jump in bank stocks and this was the main driver for the gain in the Dow.

President Obama addressed congress for the first time yesterday and again stressed the severity of the economic crisis; he vowed to put a stop to wasteful spending and vowed that banks and bankers taking public funds would be held accountable.

He also reaffirmed his plan to cut the spiraling deficit which is becoming a huge problem for the US economy and will weigh on the dollar if not significantly reduced. Overall his address offered hope and determination for recovery as he vowed “we will build, we will recover”, lets hope so!

Yesterday in Europe we saw the German Ifo survey come more or less in line with expectations, today saw GDP come in exactly as expected at -2.1%. In the UK 4th quarter GDP was actually a touch better than expected showing a contraction of 1.5%, however taken in context this brings the year on year to -1.9% which is an 18 year low and reinforces the sharpness of the slowdown.

Following yesterdays theme on the Yen we have seen further weakness for the Japanese currency. USD/YEN has now reached 97 and GBP/YEN is back over 140 as the retreat from the Yen as a safe haven continues.

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US economic fears hit asia markets

Asian stocks fell heavily on Tuesday following last night's sharp decline in American shares.

Investors responded to fears that the world's largest economy is sinking further into recession and speculation that the US Government may be forced to buy stakes in ailing banks, despite assurances from Washington that lenders would not be nationalised.

Japan's Nikkei Index fell by 1.5 per cent to a four-month low, narrowly avoiding a slide to below 7,000 for the first time in 26 years, closing at 7,268.56. In Hong Kong, the Hang Seng lost 461.46 points, or 3.5 per cent, to end the day at 12,713.64. Last night, the Dow Jones industrial average fell to an 11-year low, losing 250.89 points to 7,114.78.

Japanese shares remained in the red for the day despite hints from Kaoru Yosano, the newly appointed Finance Minister, that the Government may be working on more measures to support the domestic share market.

"The side-effects of falling stock prices are worse than expected,” said Mr Yosano. “We are witnessing many negative wealth effects with impaired assets held by banks and insurance firms.”

Japan's Government is understood to be mulling over plans to buy falling stocks with money from the public purse in an effort to keep prices buoyant.
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Japan’s biggest securities house, Nomura, announced that it planned to raise about $3.1 billion via equity issuance. The capital-boosting scheme – itself seen as a sign of deepening trouble in Japan’s financial sector – is expected to cause massive dilution for existing shareholders, a risk that sent Nomura’s shares down 8.4 per cent.

Concern is growing that the Japanese banks, despite their stable capital position relative to peers in the US, will rein-in their spending even more fiercely, triggering bankruptcies throughout the small and medium-sized industrial heartlands of Japan.

“The view out of the porthole has become rather watery,” said one Mitsubishi Tokyo UFJ broker describing the four-session run of selling in Japan.

The broader investment scene in Japan was no more cheerful. There have been ten bankruptcies among Tokyo-listed companies so far this year and the cost of insuring Japanese corporate debt against default has now near a record high.

On currency markets, the yen fell to a one-month low amid warnings by analysts that the recent strength of the Japanese currency was wildly out of kilter with the country’s economic strength and that the speculative use of the yen as a “safe haven” would now start to decline.

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US Dollar under pressure

Last week although the currency markets were choppy, we did not see a significant break out of the current ranges for the main protagonists- GBP/USD, EUR/USD and GBP/EUR.

What we did see was more negativity in the equity markets as the Dow fell to the 2002 lows below 7300 amid fears that the US government will raise their stake in Citigroup and Bank of America- a step closer to nationalization which has raised concern for investors.

On the back of this the USD is showing the strain and we have seen a move higher on GBP/USD and EUR/USD reversing the dollar strength we saw last week.

Looking to the week ahead the main data to look out for will focus on releases from Europe and the US. Tomorrow we have the German IFO survey and Wednesday we see GDP data from Germany- the IFO survey will give an early indicator of current business expectations and sentiment and Wednesdays GDP will give a statistical measure of German economic activity and health.

The Yen over the last few months has been a dominant force in the fx markets. With risk aversion coming to the fore the yen has strengthened dramatically with a 43% gain on the pound and 14% on the dollar.

However over the last week there has been a shift in sentiment on the Yen with a growing feeling that going forward the Yen may not be the best option as a safe haven currency- with GDP contracting sharply and the resignation of their finance minister Shoichi Nakagawa.

It will be very interesting to see how this scenario plays out as this will re-distribute the flow of funds to other currencies. Other safe haven favourites being the USD and the Swiss Franc, the effects of any redistribution could have a major impact on the currency markets…

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US economic stimulus is underwhelming

Geithner unveilled absolutely nothing new with regards to the Obama Administration's financial rescue package.

It has a fancy title within it, the Financial Stability Plan and the Public-Private Investment Fund (ie Bad Bank) but little else besides. The ideas are similar to those proffered by the widely lampooned ex Treasury Secretary Paulson and the methods to be used to achieve the objectives as absent as ever.

It is hard to see how or why private sector funds would rush to buy an ocean of toxic assets that are still difficult or impossible to value without there being some form of Government guarantee as to their minimum worth. So the US Banking fiasco remains well up the muddy creek with only the promise of a paddle somewhere down the line.

Equity markets hated Geithner's pronouncements and there was a rush by currency markets into risk averse mediums, primarily the US Dollar and gold.

Sterling began to ease from its recent highs following the release of UK trades yesterday.

The headline number was better than had been expected but further analysis showed that the improvement had been due almost entirely to a reduction in imports (showing a continued contraction of the economy) rather than an increase in exports on the back of an improved exchange rate advantage.

The Pound's decline continued during the afternoon and has this morning reached its Fibonacci related target of 0.8980. There should be some support/profit taking for Sterling between this level and 0.9000.

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UK BRC retail sales figures are reported surprisingly strong.

It has to be assumed that the deep discounting that was seen supporting the figures prior to Xmas has been continued going into the New Year and bargain-hunters remain resilient to the downturn.

The UK RICS house price survey was less optimistic with an average of only 3.3 properties sold per estate agent per month reported.

The problem for the housing market seems less with demand (viewings were well up as people perceived that current property prices presented a good opportunity) but more with the provision of finance.

Again, market demand will be eagerly watched. Last night, the US Senate passed President Obama's stimulus plan which paves the way for Treasury Secretary Geithner to outline the Administration's Financial Stability Plan.

This evening, he is also scheduled to testify before the Senate Banking Committee on TARP so plenty of official dialogue out later on today.

Nearer to home, the Euro was adversely affected by the Russian Banks' debt restructuring plan. The head of the Russian Association of Regional Banks said that the rescheduling of loans worth about $400 billion was under discussion. This caused both the Euro and equities to dip and, although there is no confirmed link, saw the BIS buying Euro at this morning's market opening.

Comments from ECB member Webber (who we have said before was always very hawkish on rates) again confirmed his shift of views, stating that the ECB must NOT avoid aggressive rate actions if such policy is necessary. A further reason for the market to test the downside in Euro/Dollar.

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Snows stops play in London

It's a very subdued start to the week with the Capital largely cut off by the this morning's huge snow dump.

Trading rooms are likely to be half staffed at best so expect a brief flurry of activity this morning followed by an early break for home.

We have seen Sterling come off this morning, largely it seems on Sunday's report from Moody's that they were going to cut Barclays' long term rating by 2 notches to Aa3.

Although this is only on line with the earlier move by Fitch, Far East traders took it as a reason to take profits on recent Sterling gains.

This morning we are to due to get the UK PMI survey which, following recent better than anticipated Eurozone flash PMI numbers and German IFO survey, is expected to show a modest rise for January.

From the US this afternoon we get the manufacturing ISM survey which is expected to come in around the same level as January's number.

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