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.

An unexpected boost in German IFO business sentiment gave the Euro a lift yesterday. The data showed sentiment at a three year high, hitting 106.7 versus a forecast level of 105.5 and reaffirming the positive data flow from Germany over the past month.

However, Irish woes continued with Standard & Poor’s, the ratings agency, downgrading their debt to AA- with a negative outlook.

The huge cost of supporting the Irish banking system will push debt towards 113 per cent of GDP according the S&P estimates, well above the Eurozone average putting increasing demands on the Celtic tiger’s public finances and creating serious headwinds for economic growth.

Irish ministers were understandably furious, but the fear is the austerity measures designed to reduce the government budget deficit may make the job harder because of increasing unemployment and depressing tax revenues.

This fear, applicable to the other indebted Eurozone nations, is once again hanging over the Euro and is allowing Sterling and the Dollar to regain lost ground against it.

Sterling has just received a welcome boost after the release of positive retail sales figures.Data showed a 0.7% increase month-on-month & 1.3% yoy, the highest monthly figure since April 2008.

The ONS suggested the World Cup boosted consumption of electrical goods, which after England’s performance should see a double whammy when people look to replace the TV’s thrown out of the window after the Germany game.

Bank of England minutes released showed a 7-1 vote in favour on keeping interest rates on hold, with Andrew Sentence, the only dissenter, voting for a rate rise. More interestingly, the minutes showed discussion of an extension to the asset purchase scheme if, as expected, the economic outlook continued to deteriorate.

Sterling continues its recent volatility in light of the comments & also rumour circulating yesterday that the bank has reopened dollar swap lines and low liquidity in the market exaggerates moves.

The Euro continues to tread water ahead of the Stress test results. There is increasing uncertainty around the release of the results, the planned announcement is today at 4.30pm.

Strange that an exercise in reducing uncertainty and restoring credibility is actually having the opposite effect, and that is feeding though to the Euro which now trades lower against both Sterling and the Dollar.

The perceived safe haven of the Swiss Franc has also hit the headlines as the SNB announced a huge FX loss following large bouts of currency intervention earlier in the year. The continuing strength of the Swissy will be a real headache for the central bank as it fights to remain out of a potential deflationary spiral brewing in the Eurozone.

This week is all about the euro and the approaching stress test results which will offer much needed feedback on the health of European banks.
The euro has experienced a significant turn of fortune from its June 4 and half low against the USD gaining over 10 cents to test the 1.30 level.

One reason that the euro has gained is simply that the market was significantly over short in the euro and naturally a lot of these short investors paired their positions leading to a short squeeze higher.

In addition some comfort has come back into the euro approaching Fridays stress test results as comments in the run up from members of the IMF and the ECB have been bullish – we will see!

Recent gains have led to EUR/USD testing the 1.30 level and GBP/EUR falling back into 1.17 territory. The results are due out from 5pm GMT on Friday- good feedback should push EUR/USD over 1.30.

The Euro rose significantly yesterday rising up to 1.2991 against the dollar and breaking, although briefly 1.30, a ten week high.The gains were owed to more weak data from the US where home-builder sentiment fell more than expected in July to the lowest level in over a year and comments from many of the EU countries stating their most important banks had passed the stress tests.

Germany, whose sources said Deutsche Bank and Commerzbank passed the tests look set to see Hypo Real Estate, a small nationalised mortgage lender fail, and it could be the first of many banks who specify in that market.

With the housing market across Europe still struggling, banks who exclusively work in that sector could have overly exposed balance sheets and be the next to require a takeover or even a bailout.

The Euro has also gained massively against Sterling falling well back from the high of 1.2380 3 weeks ago to 1.1750.

The BoE will be releasing the MPC Meeting minutes from the July rate decision tomorrow where we will find out more details to the divide growing in the committee.

The euro hit a two month high against the US Dollar before running into large selling resistance and falling back towards 1.25. Although German manufacturers posted some impressive sales figures at the end of last week and boosted confidence in the continuing Eurozone economic recovery, fears over manufacturing and unemployment data in periphery member nations is swamping any and all positive news from Germany.

Added to the muted response to the Stress test methodology there is enough news around the keep the Euro suppressed for the next few days.

Sterling fell below the key 1.50 level over the weekend as fears over the UK economic recovery remerged. The IMF’s warning that spending cuts and tax increases announced by the coalition Government will reduce future growth levels has pushed the pound lower against the Dollar and Euro, but the key driver of the Sterling sell off seems to be technical.

Failure to break through the 1.5260 level signalled to traders to realise profits, sending the Pound lower.

We will get a clearer picture of the current economic climate in the UK this week, with the release of the delayed GDP figures and inflation and unemployment data.

We get our first view today at the methodology behind the stress tests currently being applied to European banks to assess their health.The markets reaction will not be instant due to the expected weighty tome of equations and statistics to wade through. However, there is a key point worth noting in advance.

Analysts will be looking for the models to incorporate large haircuts on holdings of Greek bonds, maybe 30 pence in the pound and similar (but not as severe) on other periphery Eurozone countries bonds.

If, as the Financial Times suggests, the haircut in the models is significantly less than 30 per cent, the credibility of the tests and as such the banks they are testing will be completely undermined.

The whole point of these tests is to restore confidence into the banking system so it is vital that the methodology is perceived as credible. We can then wait with baited breath rather than indifference, for the results of the tests on 23rd of July.

The Dollar gave up further ground to Sterling and Euro on the back of the disappointing employment data from the US on Friday.

However, the Forex market is either ignoring or completely in the dark about when Mr Obama will begin to tackle the US budget deficit (I think it may be a combination of both). Currently running at over 9% of GDP, it seems some in the US are unwilling to implement similar austerity measures to those in the UK to tackle the deficit.

And since the US makes up such a large slice of world demand, any budget cuts and the time scale over which they are implemented will have wide reaching implications for its main trading partners, China, The UK and the Eurozone and also for the Dollar over the coming months.

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The Euro reached a two month high versus the US Dollar late on Friday as investors remain content for the time being with better than feared results from the European Central Bank’s tender facility.The Euros surge continued into Friday afternoon’s session on the back of weaker than expected US Non Farm Payrolls data. The risk and commodity currencies took a bit of a hammering late on Friday with both the Euro and Sterling making headway going into the Independence Day Holiday affected weekend and have retained the move so far today.

This week is a busy one in terms of key central bank meetings.

First up is the Reserve Bank of Australia announcing its latest policy decision on Tuesday with the market consensus expecting no change to the base rate.

Next up on Thursday is the Bank of England’s turn. After several months of uneventful policy decisions by the BoE, Thursday’s announcement will be the most eagerly awaited for quite some time. Whilst no change in the bank rate is expected, it’s the first meeting since the emergency budget on June 22nd.

The minutes, due for release on July 21st will be scrutinised for any sign that fiscal consolidation could deter early rate hikes. Furthermore, signs of division on the committee have also recently emerged, culminating in MPC Member Andrew Sentence’s decision to vote for a rate hike at the June.

Global stock markets have fallen sharply on renewed concerns over the European banking sector.
Investors are apprehensive ahead of a deadline this week for banks to repay loans taken out a year ago at low interest rates.

As a result, leading European share indexes slumped about 3%, while US stocks fell more than 2% in morning trading.

The concerns also pushed the Pound to a new 19-month high against the euro.

The pound rose almost half a cent to 1.2389 euros, its highest level since the immediate aftermath of the financial crisis in November 2008.

Last summer, the ECB was forced to offer European banks cheap 12-month loans to help them through the financial crisis. This was a longer repayment term than the usual three to six months.

But the ECB has said it will not offer 12-month loans this time around, raising fears that European banks may again face funding difficulties.

So with heightened concerns about which banks still have bad loans on their books, there is a growing fear among investors about the health of the European banking sector.

The Pound Sterling has hit a new 19 month high against the euro as the 16 nation currency comes under renewed pressure.
The Pound rose almost half a cent to 1.2327 euros, its highest level since the immediate aftermath of the financial crisis in November 2008.

Markets are concerned ahead of a deadline this week for European banks to repay loans taken out a year ago at low interest rates.

Against the dollar, however, the pound fell more than half a cent to $1.5029.

The European Central Bank will offer funds on Wednesday to banks looking to repay loans later this week.

The euro has been under pressure since concerns about high levels of government borrowing triggered a debt crisis earlier this year.

But it is not just a weak euro that is boosting the pound.

Sterling has also benefited from comments made by Bank of England Monetary Policy Committee (MPC) member Andrew Sentance on Monday, in which he said the UK would need to start raising interest rates soon.

Mr Sentance voted to raise rates at an MPC meeting earlier this month.

Analysts said that if inflation remains well above the Bank’s 2% target rate, the pressure to raise rates will increase. Inflation, as measured by the Consumer Prices Index, currently stands at 3.4%.

Higher interest rates make sterling a more attractive investment and tend, therefore, to increase its value.