WISE MONEY

Yesterday was an eventful day for the euro as it made significant gains versus both Sterling and the Dollar. The British Pound hit a 3 week low against the Euro as the UK Manufacturing PMI came in well below expectations at 54.3 in August following a reading of 56.9 in July.

Nationwide house price data out overnight was also disappointing so we may see Sterling remaining on the back foot today.

Robust economic readings in both China and Australia overnight, spurred on demand for higher-yielding assets prompting the Dollar and Japanese Yen to fall against most of their major counterparts.

Australian GDP surprised strongly on the upside at 1.2% q/q, against the anticipated 0.9% q/q. This coupled with better than expected manufacturing numbers in China have led the market to the risk on trade.

Next on the menu for markets to digest is the US payrolls data tomorrow. Despite the ADP jobs report revealed a surprise 10k decline the employment component of the ISM manufacturing survey strengthened to 60.4, leading to an improvement in August manufacturing payrolls.

Ahead of the payrolls release the US data slate today largely consists of second tier releases including July pending home sales, August chain store sales, weekly jobless claims, and factory orders. It is worth paying particular interest to jobless claims given that the four week moving average has been edging higher, suggesting renewed job market deterioration.

The consensus is for a 475k increase in claims, which will still leave the 4-week average at an elevated level.

China is now officially the second largest economy in the world, after the US.The Japanese GDP data out overnight reflected that China has moved into the lead and a number of economists are forecasting that China will take over as Number One by 2027.

Friday was a busy day on the economic data front. First up, we saw figures released showing that the Eurozone economy expanded in the second quarter at the fastest pace in nearly four-years.

The eurozone’s seasonally adjusted preliminary second quarter GDP showed an expansion of 1.0%, compared with the previous 0.2% and the expected 0.7%. The biggest jump in the figures came from Germany’s GDP, with a preliminary reading of Q2 GDP showing extremely robust 2.2% q/q growth, well above expectations of 1.3%.

This was the fastest pace of growth in nearly 20 years since German reunification. Global demand and a weaker Euro helped boost exports during the period, sustaining growth in the area.

Whilst the UK can take comfort from the fact that they can control their own currency, there are still issues. House prices in the UK have taken a bit of a knock for the month of July according to figures posted by Rightmove, the property website.

The figures reflect that people wanting to sell their homes are having to cut prices faster than at any time this year following a flood of properties hitting the market. On a national basis house prices have come in by 1.7% from July to August.

Following the Bank of England cutting its growth forecast on Wednesday and raising its estimate of inflation this housing data has not helped the continued fear around the risk of a double dip recession.

One in fifth of the 7.66 trillion yuan (1.1 trillion dollars) that Chinese banks lent to local governments is “at serious risk of default”, is the latest potential default risk problem to halt the global recovery. Chinese banks lent vast sums of capital to local Chinese governments for construction projects after Beijing called for nationwide efforts to stimulate the economy.

However, only one quarter of projects financed by the loans have the ability to meet repayments, according to the Century Weekly.

The banking regulators, along with the banks that have the biggest exposure, will carry out detailed discussions with local governments starting in September about how to recoup the loans, the report said.

China has powered out of the global crisis on the back of a stimulus package worth four trillion yuan and the state-backed bank lending, which saw new loans nearly double from the previous year to 9.6 trillion yuan in 2009.

This latest potential default raised concerns in Beijing over a possible new crop of bad loans that could threaten the world’s third-largest economy.

China’s announcement over the weekend that it was ending its currency’s two year peg to the US dollar boosted Asian stock markets.
Japan’s benchmark Nikkei 225 stock index gained 177.18 points, or 1.8pc, to 10,172.20 in the morning session and Australia’s S&P/ASX 200 was up 0.7pc at 4,604.30.

Hong Kong’s Hang Seng index climbed 1.4pc to 20,571.40. China’s Shanghai Composite Index added 0.6pc to 2,527.22. Benchmarks in Singapore and Taiwan all advanced in early trading.

Investors gained confidence from Beijing’s announcement Saturday that it would determine the exchange rate from multiple currencies, rather than the dollar alone, analysts said.

The yuan’s value has been pegged to the dollar since the global financial crisis took hold in 2008, causing major friction with countries who say it is undervalued for China’s own benefit.

The Chinese central bank also said it plans no major exchange rate adjustments, dousing speculation over possible one-off moves in the yuan’s dollar value. That reduces uncertainty, allowing some investors to plunge back in after weeks of holding back.

The impact of any change in the yuan’s value will be mixed, he noted, with exporters likely to suffer and importers and airlines, whose debts are denominated in dollars, gaining.

The yuan’s value has been pegged to the dollar for two years, causing friction with countries who say it is undervalued for China’s own benefit. A stronger yuan would make Chinese exports more expensive and bring relief to foreign manufacturers that have struggled to compete.

The official exchange rate for China’s currency stood unchanged Monday morning in line with the central bank’s warning the value of the yuan would not dramatically rise after its two-year peg to the dollar ended.

The People’s Bank of China left the yuan’s parity rate against the dollar unchanged Monday at 6.8275, the official Xinhua News Agency said. The rate is a weighted average of prices given by market makers, excluding highest and lowest offers.

Asian stock markets fell today and the euro and sterling hovered near the lows they reached yesterday as concerns persisted over Europe’s debt worries.The Nikkei index in Japan fell 98.81 points, or 1 per cent, at 9,439.13 to record its lowest close for six months after earlier falling as far as 9,378.23. Japan’s export-led economy is dependent on demand from Europe.

Asian investors were also jolted by a warning from the International Monetary Fund that the European sovereign debt crisis could spill over to Asia.

Naoyuki Shinohara, the IMF deputy managing director, told a forum in Singapore: “Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand.”

He also warned that although Asia’s bright growth prospects were currently attracting capital, “further increases in global risk aversion could see capital flows change direction quickly.”

Investors were also unsettled by comments by the ratings agency Fitch that Britain faced a “formidable challenge”.

However after currency trading began in London this morning both the euro and sterling edged up slightly against the dollar. The euro rose nearly a cent from yesterday’s four-year low of $1.1876 to $1.1967 while the Pound improved by half a cent to $1.4462.

Traders and analysts said that the focus was on the European Central Bank (ECB) to shore up sentiment.

In a further sign that investors were seeking cash the Bank of England’s latest offer to buy corporate bonds from banks was met by record demand this week. Banks tried to sell £507 million of bonds, the highest since the Bank of England began its bond buy-back programme in February last year as an attempt to restore confidence in the midst of the financial crisis.

The price of gold reached $1,236 an ounce, within sight of yesterday’s record high of $1,250.

The euro weakened for a second day against the US Dollar, the Japanese Yen and the British Pound as signs the European debt crisis is spreading revived concern the region’s recovery will slow.In particular, the 16 nation currency fell to within one yen of its weakest point in more than eight years after the IMF urged Spain to do more to overhaul its ailing banks.

Markets are concerned about what policy makers can do to contain the debt crisis should it spread from Greece to bigger nations like Spain and Italy. The IMF welcomed the new Spanish austerity measures, referring to plans to rein in its budget deficit with the deepest cuts in three decades but expressed concern over its banking industry and the slow reaction in consolidating ailing lenders with stronger partners.

The EUR/USD is now back trading close to the May 19th four year low.

Despite recent acceptable data from the Eurozone countries themselves, there is a real fear that the recovery will sputter to a halt amidst the internal wrangling of how to deal with the spiraling funding crisis.

This will obviously have a knock on effect towards the global recovery, with the UK especially exposed to a weaker European market.

Sterling has accordingly been shorted aggressively, but largely against just the Dollar and the Yen. It has managed to gain slightly against the Euro on the back of QoQ GDP coming in as expected at 0.3%.

The US was decidedly quiet yesterday although we are still experiencing US$ LIBOR ticking higher on a daily basis adding further fuel to the Dollar strength argument.

The market appears to be waiting for anything tangible on exchange rates emerging from Geithner’s meeting with Chinese officials.

Yesterday they appeared to skirt the issue and spent most of their session together discussing Europe and the implications to both countries of the current situation. Today’s final session could be more interesting.

Stock markets around the world suffered further falls yesterday as investors continued to unwind risky positions and move into calmer waters.

The problems in the Eurozone have been the driving force behind the huge market movements we have seen across the currencies over the past few days.

China has been powering the world’s economy over many years, but with Europe its largest customer, investors fear a European induced Chinese slowdown would derail any economic recovery.

Hedge funds are reported to be reversing positions to preserve capital, most notably in the Aussie dollar pairs, which have seen large swings in value over the past few days.

Disappointing economic data yesterday from the USA showing a surprise increase of 25,000 in jobless claims and poor Eurozone consumer confidence figures exacerbated the negative sentiment in the market yesterday.

Sterling fell to its lowest level in 13 months against the Dollar driven by the rush into the safe haven rather than anything Sterling based.

Retails sales showed a third straight month of increases, a positive bit of data for the UK that was shrugged off very quickly by the market. Sterling sentiment remains weak, so expect the Pound to come under further pressure as risk is taken further off the table.

Last night, the US Senate approved the financial reform bill after lengthy negotiations. The legislation, penned as a response to the Credit Crunch will, amongst other things, stop deposit taking banks from trading on their own accounts (proprietary trading) and allow the government to seize control of a failing firm that is judged to be systematically important.

We will have to wait on the fine print, but this will almost certainly have large implications for the markets because the biggest players (the banks) will be forced into restructuring. The added uncertainty of how this will work is adding to fears over the Eurozone.

Sterling shrugged of BIS comments about Britain’s potential fiscal train wreck and continued its recent strength against the Euro and Dollar helped by better than expected manufacturing and housing data yesterday morning.

Overnight we briefly moved above 1.53 on the dollar before running into resistance and 1.1451 on the Euro.

As widely expected, the Bank of England kept interest rates and QE unchanged at 0.5% and £200 Billion respectively.

The ECB also kept interest rates unchanged at 1%, but as mentioned yesterday; all eyes were on ECB president Trichet’s press conference and the planned announcement of changes to collateral policy, forced on them in part to stop Greece from being locked out from ECB funding under the previous rules.

He also continued his opposition to IMF involvement in any future bailout of the Hellenic republic. The general feeling was that Trichet’s performance was one of his poorest and the spread between German and Greek bonds, indicating the perceived riskyness of holding Greek debt, widened to its highest level ever.

Overnight against the dollar however, the euro regained lost ground yesterday and now trades at the 1.34 level.

A mixed day in the US, with data showing rising initial jobless claims offset by very positive chain store sales. Treasury Secretary Tim Geithner finished his whistle stop to China with no major announcements regarding Yuan revaluation – yet.

A largely political budget failed to rattle the financial markets and the Pound was unmoved on the back of the budget- although it did slip against the US Dollar due to other factors.

It was announced that there would be a reduction in the government borrowing requirements but it was not enough to shift sterling especially as no clarity was divulged on how exactly the deficit would be reduced. Sterling did slip against the US Dollar following jittery trading on the downgrade of Portugal and the ongoing back and forth with Greece and the EU which led to USD buying.

This morning the Pound has staged a recovery following much better than expected retail sales data from the UK at +2.1% month on month; currently we sit at 1.4950 on the USD and 1.12 against the euro.

The euro was the big mover in the currency markets yesterday- on the downside.

There is hope of an agreement for Greece in the next couple of days from the EU summit but until this is definitive the euro will be under pressure.

Interestingly the PBOC (Public Bank Of China) have commented that the Greece debt crisis is just the beginning for the Euro zone- not good news for the euro and this could encourage longer term holders of the single currency to start dumping it and thus forcing it lower still.

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