WISE MONEY

The International Monetary Fund’s (IMF) has raised an additional £268 billion ($430 billion) for the pot meaning another set of support for the eurozone when it will be required.However, several other uncertainties persist to bother markets signifying that any rally could be short lived.

There is plenty of data and events this week including central bank decisions in the US, Japan and New Zealand.

In addition, US corporate earnings will stay under the spot light while bond auctions in the eurozone will also provide market drive.

It is doubtful that the Fed meeting tomorrow and Wednesday will incite any change in the currently low FX volatility atmosphere given that strategy settings will stay unchanged, with the bulk of FOMC members likely to look for the first alterations at the earliest in 2014.

The Fed as a result is unlikely to stir the Greenback out of its daze and if anything a fall in durable goods orders, little change in new home sales and a pull back in consumer confidence will play in support to Dollar bears over the coming week.

Even a relatively firm reading for Q1 GDP will be seen as backward looking given the slowing expected in Q2.

Over to Europe and the single European currency will have to compete with political proceedings as it absorbs the outcome of the initial round of the French presidential elections.

The reality is that the political course will carry on to a second round on 6 May which will act as a limit on the euro.

A variety of ‘flash’ purchasing managers indices (PMI) readings and economic opinion gauges will present some primary direction for the Euro but mostly stable to softer readings suggest little stimulation.

As a result euro/ US Dollar will largely remain within its recent range although news from Spain and Italy and their debt markets will have the potential to bring into play larger moves against the euro.

The UK has offered just under £10 billion in loans to the International Monetary Fund (IMF) to help economies in trouble.It is part of a global effort to bolster the fund’s lending capacity, which IMF managing director Christine Lagarde wanted to increase by £250 billion ($400 billion).

The UK is not alone in funding the lifeboat. Japan will contribute $60 billion, Australia $7 billion, Singapore $4 billion and the Republic of Korea $15 billion.

The IMF had already received commitments of $320 billion.

Finance ministers from the G20 group of leading economies discussed boosting the IMF’s resources at a meeting in Washington.

Mr Osborne said the loan was important to the UK: “It’s in Britain’s interest that we have a stable and strong world economy – that creates jobs in Britain.”

He added that any loan made would bring in a return in the form of interest.

He can lend up to £10 billion without parliamentary approval because Parliament has previously approved £40 billion of loans, of which only £30 billion has so far been committed.

But this latest pledge is unpopular with some members of Mr Osborne’s Conservative Party, who had been urging him not to sign up to an increase.

Backbench MP Peter Bone described the decision as “bonkers”, describing any efforts to prop up the eurozone as a waste of time.

The UK Independence Party leader, Nigel Farage, said: “[Mr] Osborne must tell the IMF that he will not donate one more penny piece to the failed euro bailouts.”

The Treasury says its contribution to the IMF is not public spending. All UK loans to the IMF are financed from the UK’s Official Reserves, remain UK assets and do not contribute to public sector net debt.

The IMF hopes that if private investors think that countries in trouble can be rescued if necessary, they will be more willing to lend to them and any funding problems will not escalate.

It has already warned that the eurozone’s debt crisis poses the biggest threat to the global economy, and warnings about Europe are expected to top the eventual communique from the meetings.

Money markets were dealt a surprise as the Consumer Price Index (CPI) rose in the UK to 3.5% up from 3.4% in February according to the Office for National Statistics. The ONS blamed higher food prices specifically soft drinks, bread, cereal, meat, fruit and vegetables coupled with rises in clothing & footwear.

However there was some good news as utility bills were lower than one year ago following energy companies reducing tariffs in February last year.

All eyes will know be on the Bank of England as this latest rise could reduce the likelihood of additional Quantitative Easing in next months MPC meeting but with stuttering growth the Bank of England may have no choice.

So far today in the UK we have seen the UK Jobless Claims figures fall for this first time since last spring.

Unemployment fell by 35,000 to 2.65m according the ONS leaving the overall rate at 8.3%.

Furthermore we saw voting in the Bank of England for interest rates and QE voting come in at 9-0 and 8-1 to keep rates on hold and maintain the contribution at £3.25bln.

Sterling has rallied as a result of these figures and currently sits at 1.2212 against the Euro the highest reading since September 2010. Cable has also risen against the US Dollar and is fast approaching the key psychological level of 1.60 currently trading at 1.5979.

In other financial news Warren Buffet has announced he has stage one prostate Cancer which will create further hype around the successor to his Berkshire Hathaway business.

As for the rest of this week we are pretty light on data with inflation data in New Zealand, Canada and the Germany of any real significance.

The cost of borrowing for Spain has jumped above 6%- increasing fears of a bailout.The yield on Spain’s 10 year bonds reached 6.1%, ahead of auctions of debt on Tuesday and Thursday that could be increasingly expensive for Spain.

Investors have been worried by data showing Spain’s banks are entirely dependent on emergency ECB loans.

In comparison, the yield on 10 year bonds from Germany- the eurozone’s strongest economy, is only 1.73%.

Spain is suffering from a deep economic slump brought about by a bust in its property and construction markets and over spending by the autonomous regions on health and education.

The rise in Spanish bond yields adds to the evidence of storms returning to the eurozone.

Interest rates of over 6% are not affordable if sustained indefinitely, though Spain is still below the 7% threshold that has sometimes been seen as triggering the need for a bailout.

There are also worries that the government might face a large bill to prop up the country’s banks, which made heavy losses on loans to property buyers.

The Bank of Spain said recently that the county’s economy contracted in the first quarter of the year – but it did not say by how much. The economy shrank by 0.3% in the three months to December, so this additional contraction implies that Spain’s economy is in recession.

On Friday, the Bank of Spain – the central bank – said its net lending to its banks in March had risen to 228 billion euros (£188 billion), up from “only” 152 billion euros a month earlier.

The big jump was mainly due to a second auction of three year emergency loans carried out by the European Central Bank, which has given 1 trillion euros to banks since December.

This money was intended to be lent by the ECB to national central banks, which is turn lent to commercial banks who would buy their country’s debts and bring borrowing costs down.

But these loans are creating their own financial headaches- as Spanish banks are now sitting on rising loses as spanish government debts fall.

The eurozone is still heavily under the spotlight as Spanish and Italians’ debt interest rates are still dangerously high.However sentiment that the ECB could resume emergency bond buying has helped to ease fears.

The euro still remains pegged toward 1.31 against the US Dollar and 1.30 remains a key support area for EUR/USD and given the consolidation at 1.31 we could see some recovery towards 1.3150 to 1.32.

The Pound on the other hand is going from strength to strength and has hit a one year high on a trade weighted index- that is the Pound as a measure against a basket of currencies.

The Pound initially edged higher against the euro in line with euro concerns and improved economic numbers from the UK.

Sterling however has not managed a sustained push higher against the euro. This suggests a lack of appetite to sell the euro too much as the market adopts a wait and see approach to the developments on Spain and Italy.

In other news the yen fell for a second day against the dollar and euro after Bank of Japan Governor Masaaki Shirakawa indicated further easing of monetary policy.

Later today we see further feedback from the US with initial jobless claims and the producer price index- with markets in risk off mode and following weaker than expected payroll numbers last week a good set of numbers is hoped for.

The spotlight is returning to Europe after a brief period of calm. The spread between the benchmark German 10 year bond and its Spanish and Italian counterpart’s widened on continued bearish data and rumours that GDP estimates across the southern Mediterranean countries will be sharply revised downwards.

The uncertainty remains whether the eurozone has enough left in reserve for when Spain or Italy need emergency rescue loans.

The worry is dragging down equity markets from recent highs along with risk currencies like Sterling and especially the commodity currencies which have been the main casualty of recent risk aversion.

There are several bond auctions in the eurozone today; Germany and Italy tap the well for smallish amounts of €3 billion and €5 billion respectively.

There will be strong demand for German debt as ever, but with the problems from last week’s Spanish auction fresh in the mind today’s offering from Italy will be closely watched for overall demand and also the price the market charges the Italian government.

The ECB meeting is on Thursday this week where it is unlikely that they will make any changes to interest rates or the special liquidity measures.

With risk sentiment waning, extra importance will be given to the Chinese GDP data due on Friday.

The data is expected to be around the magical 8% level, as it always seems to be.

Anything lower would be a real shock and compound the bearish trend we’ve followed this week.

Europe’s 17 eurozonegovernments have agreed to deliver €500 billion in a new bailout funds today in the hope of erecting a firewall big enough to contain the sovereign debt crisis and encourage the International Monetary Fund members to commit a similar sum to emergency reserves.But the eurozone finance ministers, meeting in Copenhagen amid calls to erect the “mother of all firewalls”, ditched explicit earlier proposals to keep a further €240 billion (£200billion) in reserve for the next two years.

The deal conformed to German prescriptions for a minimalist bailout fund, a recipe that the European commission in advance described as inadequate to the challenges confronting the euro.

Ministers nevertheless endeavoured to impress the bond markets, the Americans, and the Chinese, trumpeting the agreement as worth “more than a trillion dollars” in the hope that this will press the big IMF donors into doubling the monetary fund’s reserves to a similar figure next month.

“We are now in a strong position for discussion on the IMF in April. It is a good signal,” said the French finance minister, Francois Baroin.

“All together the euro area is mobilising an overall firewall of approximately €800 bn, more than $1tn,” said a Eurogroup statement.

But that figure included €100 billion in bilateral loans to Greece from EU countries in 2010 as well as €200 billion to Ireland, Portugal and Greece from the temporary eurozone bailout fund which closes next year, although those three programmes will run their course until 2015.

The Copenhagen meeting degenerated into acrimony and some chaos when the Austrian finance minister, Maria Fekter, upstaged the eurozone leaders by first announcing an €800 billion firewall.

Jena-Claude Juncker, the veteran Luxembourg prime minister who has been chairing the eurogroup for eight years and whose term expires in June, threw a hissy fit and cancelled a media conference at which he was to unveil the decisions.

The new money comes in the form of the European Stability Mechanism (ESM), the permanent eurozone bailout kitty and embryonic European Monetary Fund which starts in July. The ESM’s launch has already been brought forward and ministers on Friday also agreed to speed up the process of paid-in capital to get the fund fully operational within two years.

Its lending capacity was capped at €500 billion, as has long been planned.

A draft statement yesterday said that the spare €240 billion would be held in reserve for emergency use, but was dropped today.

The permanent fund’s lending capacity hinges on €80 billion being paid in five instalments till 2014 in order to retain a triple-A credit rating, meaning that it could be two years before the fund is operating fully as foreseen.

But the parallel running of the current temporary and the future permanent funds will ensure a lending capacity of €500 billion, the ministers said.

The euro suffered again overnight as reports in various papers talking up the possibility of Greece badly missing their deficit targets. The news has caused another shift out of the euro as investors have looked for safer places to invest their funds.

The articles, if proven true, will add yet more pressure onto the rest of Europe with major doubts already surrounding the success of the latest bailout for Greece worsening.

However, unlike when Greece was still seeking this bailout, the US Dollar hasn’t been the sole beneficiary.

Sterling has held its own against the Greenback by slipping back only 1 cent compared to the 3 cents it lost last time.

This is partly due to improved sentiment which was kick-started by the US with strong data realises from their jobs sector.

The UK announced its latest employment figures today with the unemployment rate remaining at 8.4%, a set of results which weren’t too bad.

Apart from this, it is another data light day with little of note being released. We can expect the US Dollar to remain strong as fears being to grow about Greece’s latest bailout.

Greece has a potentially difficult week ahead as a group of private investors consider the terms and conditions of an arrangement that’s intend to cut €107 billion from the Greek’s €340 billion debt burden.The whole deal hinges on whether the creditors are willing to take a hit of 75% on their holdings in return for a combination of long term Greek bonds and debt issued from the bailout fund.

Due to terms of the second bailout if over a third of the bond holders reject the deal the overall bailout could collapse as per terms put through Government last week.

The reaction from the rest of Europe specifically Austria is now sceptical about the overall viability of the package.

Chancellor Werner Faymann said yesterday that the second bailout is not the end of the matter.

“I would not trust anyone who says that for Greece is enough,” Faymann told Austrian media.

“For Greece it depends on whether they can stick to these measures over several elections.”

Greece will begin voting at the end of this month with a general election in the offing.

In the interim, Greek officials are required to gain the backing of a minimum of 2/3 of its private holders by Friday to employ the debt swap and comply with the requirement terms of its second bailout.

Worst case scenario Greece could run out of funds in less than a fortnight and could prompt an unruly and possibly catastrophic default.

As you would expect the news is weighing heavily on the euro right now and has seen EUR/USD slip to 1.3191 from 1.3440 at the same point last week and Sterling is approaching the key psychological figure of 1.20 at 1.1981 against the single European currency.

Money markets will keep a close eye on developments in the med and this will provide the impetus for sentiment this week.

Elsewhere the week is largely dominated by Central Bank interest rate decisions with announcements in Australia, New Zealand UK, Europe and Canada all expecting no change in the overall rate.

Any variance from these expected figures, with any turbulence from Greece and Friday afternoons US Non-farm payroll data could lead to a volatile week for the markets.

Sentiment remains the primary driver of the euro as the single currency sold off sharply in afternoon trading yesterday after Eurozone members decided to delay more than half of the €130bn Greek bail-out funds.  A decision that was supposed to finally put to bed the Greek issue, at least for a couple of months, has managed to calm volatile markets for less than two weeks.

Thirty eight different measures need to be implemented by the Greek government before the remaining €71.5bn is handed over.

This may be as early as next week. But slicing the payment in two allows hardliners in the Netherlands and Germany a foot in the door and the potential for further delays.

It is this uncertainty which is hurting euro sentiment and pushing the Sterling pair back towards the 1.20 level.

Sterling remains stuck in recent trading ranges and as expected this week’s construction and manufacturing PMIs have not moved the Pound at all.

The manufacturing number was lower than expected and was cancelled out by better than expected construction figure this morning.

Next week is huge for big ticket data with the ECB and Bank of England rate decisions and the US non-farm payrolls the highlights.