WISE MONEY

Money markets have fallen as eurozone finance ministers continue to force Greece’s private creditors to accept a lower interest rate on their loans to Athens.
UK and French share indexes closed lower on Tuesday, while Wall Street fell on opening.

Euro ministers said creditors must take less than the 4% they had offered and urged both sides to reach a deal this week.

A deal is necessary for Greece to receive the bailout funds it needs. Without the funds, Athens will not be able to make billions of euros of loan repayments due on March 20th.

The FTSE 100 index in London closed down 0.5%, while the Cac 40 in Paris fell 0.3%, but the Dax in Frankfurt reversed earlier losses to close slightly up by the end of trading, gaining 0.4%.

The Dow Jones Industrial Average in New York was down 0.3% in morning trading.

Ministers confirmed that 130 billion euros (£108 billion) was available for the country, but also called on Greece to accelerate structural reforms to strengthen its economy before funds would be released.

However, Charles Dallara, head of the Institute of International Finance (IIF), which is representing Greece’s private creditors in negotiations with Athens, warned Europe was putting a “decade of progress at risk” over the management of the talks.

He added the 4% figure was a firm statement of their intent. He said: “Our offer is on the table and our position is clear.”

He added Europe must keep the support of the private sector, given the massive amounts of debt that have to be refinanced from France to Portugal.

He added that there was not a country that did not need investment from the private sector.

“Investors need to feel confident in their investments in sovereign debt,” he said.  “There are a lot of issues that remain unresolved, and I’m not entirely sure the path to resolve them is truly framed”

The finance ministers, headed by Luxembourg’s Prime Minister Jean-Claude Juncker, said they welcomed progress made in the talks between Athens and its private creditors, but called for an agreement “in the next few days”.

Mr Juncker also made clear that ministers backed Greece over the rate of interest it should pay on new bonds that will replace existing bonds held by creditors.

Ministers reiterated that a deal with private creditors was essential for the European Commission, European Central Bank and International Monetary Fund to release further bailout funds.

The wise money markets continue to be driven almost exclusively by extreme changes in sentiment on a day to day basis. The recent euro rally stems from the positive outcome of Spanish and Italian bond auctions yesterday.

Both countries we able to place the bonds at considerably lower rates than in recent auctions lifting sentiment and the euro throughout yesterday and into this mornings trading.

Worryingly data just out showed Spanish Banks borrowing almost €140bn from the ECB in December, almost the record high set back in July 2011 and this tugged sentiment back in the negative direction.

Both central bank decisions were tame affairs, neither the ECB nor BOE changed rates or announced any change to existing QE programs.

For the Bank of England it seems to be a very much wait and see approach before they announce further asset purchases.

Mario Draghi and the ECB can be pleased with the results so far from the LTRO in December.

Confidence seems to be improving in the European banking system because investors now feel the ECB stands behind the banks, and this is translating into lower yields for European Government debt.

The positive US data flow of recent weeks came to a halt yesterday afternoon, with retails sales figures lower than estimates.

This afternoon’s confidence survey will be very interesting to watch to gauge the state of the consumer given such weak retail sale figures and increasing jobless claims this week.

Looking towards next week there is a huge amount of Chinese data to digest first thing Monday.

Positive Chinese data is generally seen as bullish for the world economy, and hence US negative, so the release will probably set the tone for sentiment for the early part on the week.

Europe will remain under the spot light over the next couple of days with the European Central Bank (ECB) meeting today, alongside debt auctions in Spain and Italy. The speculative market is predominantly short EUR while policy makers, specifically German Chancellor Merkel and French President Sarkozy are making the right noises; it appears the penny has dropped for Eurozone officials that it is not only about austerity but also about growth and reform.

Reports that Fitch ratings are unlikely to downgrade France’s ratings this year has provided a welcome boost to Eurozone confidence.

However Greece could yet spoil the party given the continuing dialogue with the Troika to decide the second bailout package for the country.

Political resistance within Greece suggests that more austerity may not be easy to execute.

For the time being there are ongoing questions about the degree of write-downs that Greek debt will endure.

In spite of these issues it looks like investors are becoming more immune to events in the Eurozone. While we still have high bond yields for Italy and other euro sovereigns it seems that risk appetite has improved.

One feature that is providing support to sentiment is the positive news out of the US.

Even though the Q4 earnings season has not started particularly well, data releases look rather more positive.

Last week’s US December jobs report continued to filter through positives to the market and we have also seen a pick up in small business confidence and a rise in consumer credit.

These recent improvements in economic data snaps highlight the gradual recovery process underway in the US and the growing divergence with the eurozone economy.

This supports the view of the US Dollar out performing the euro in the short to medium term.

Festive cheer in the money market seem to be running out already as we move towards the end of the first trading week of 2012. Disappointing Italian and Spanish PMI data more than offset a decent German figure and the eurozone is looking more and more likely to be heading into another recession.

The euro was under pressure for most of yesterday as risk was dumped and the US Dollar strengthened.

The theme is continuing this morning as the single currency continues to be sold; European banks continue to make headlines for the wrong reasons as they park newly created ECB cash back at the central bank rather than lending or investing it in the real economy.

Retail gloom continues to hang over the UK with many of the retailers reporting crucial Christmas figures this week.

Next shares were pummelled after they reported disappointing sales over the festive period and set a gloomy tone as we wait for results from rivals M&S.

John Lewis were a ray of light in the gloom, posting impressive sales growth compared to last year, but most if not all retailers are suggesting that economic conditions remain a real concern and are expecting a challenging year.

The Pound has opened the year in much the same way as it finished the last, namely taking a back seat to the Euro and Dollar with economic fundamentals remain less of a driver than politics.

The wise money is hoping for a clear sign of the economic picture on Friday from the Non-farm payrolls, either showing the recovery continuing or a worsening picture and the prospect of further QE this year.

More likely is that the number shows the US economy to the chugging along slowly, leaving both the Fed and the markets disappointed.

European stock markets started the year in optimistic style with gains led by the German DAX index after the release of better than expected levels for eurozone purchasing managers indices (PMI). Furthermore, Chinese data indicated a rise in its PMI which helped to boost risk sentiment.

The combined eurozone data however, remained at a weak level, contracting for a fifth month in a row, and remains constant with eurozone recession.

One would not expect this equity rally to continue over the rest of this week, as risk aversion is set to play out alongside the on-going Eurozone debt and global growth worries.

Indeed, both French and German leaders in their new year messages talked about the risks ahead.

A summit between Germany’s Merkel and France’s Sarkozy is planned for January 9th ahead of an EU Finance Ministers summit on January 23rd. It is unlikely that there will be any major policy decisions in Europe before then.

In the meantime, German press reports suggest Germany is pushing for an even bigger write down of Greek debt than previously approved will only add to risk aversion over the short term.

The report in the Greek press highlighted the prospect of a 75% write down of Greek debt a far cry from the 20% proposed some months ago.

Eurozone markets continue to be troubled by the scenario of credit downgrades by major ratings agencies at a time when many countries have to issue hefty amounts of debt to suit their funding needs.

Against this background the EUR is set to remain under pressure, with a notable drop below EUR/JPY 100, its lowest level in over a decade registered. Reflecting the deterioration in sentiment for the currency, EUR speculative position hit an all-time low at the end of last year. This is unlikely to reverse quickly, with sentiment set to deteriorate further over coming weeks and months as the EUR slides further.

The US Dollar continues to benefit from a growing ‘risk off’ attitude developing in the markets. Furthermore, the recent improvement in US data, including October’s existing home sales yesterday reduced pressure on the Fed for additional QE, which in turn supported the Dollar.

We have an opportunity to see the Fed’s latest view on this subject during the FOMC minutes later this week, with the Fed set to keep the option open.

Despite the lack of union within the US Super committee to slash the US budget deficit by $1.2 trillion, this has not hurt the Greenback’s improvement as these talks were always expected to be difficult.

Further Dollar gains are possible but the speed of its upside move could slow.

Meanwhile Eurozone sentiment has deteriorated again, EUR/USD is holding onto the key mid-level of 1.35 in spite of several flirtations below here.

This is largely attributed to ECB bond purchasing which helped reduce some negativity on the single European currency however there are suggestions that the central bank has imposed a limit of EUR 20 billion on such purchases.

The Euro is not being helped by the continued rumours of a potential Euro break up regardless of the Greek PM Papademos downplaying the talk of a Greek exit.

Finally Sterling has become a problem child for the markets with the currency on track to test the October low of 1.5272.

The Pound will struggle to find support this week, with a potential dovish tone in the latest monetary policy committee (MPC) minutes likely to cause additional harm, with support from the MPC for more QE set to be exposed.

Ahead of the minutes, today we saw UK public sector net borrowing, excluding financial interventions, falling to £6.5bn in October.

The figure was down from £7.7 billion last year according to the ONS and slightly lower than expected, as growth tax revenue outpaced spending.

Sterling currently trades at 1.5656 against the Greenback and has also lost ground against the struggling Euro at 1.1560.

Last week’s money market moving events meant several twists from risk on/risk off however there is no clear path for the markets.The main market movers were both central bank meetings in Europe and the US, in addition, US jobs data supplied ample volatility points for investors.

It’s a quiet week ahead for headline US data, with trade and Michigan confidence, the main events.

Consequently, the greenback will take direction from developments in Europe and we could see the Dollar strengthen as eurozone tensions continue.

On the subject of Europe, the single European currency remained relatively firm in spite of a Greek referendum suggestion.

If this had gone ahead it could signal the beginning of the end for Greece’s eurozone membership.

We did see small losses on the euro over the week and we may see something similar this week as investors dig through news regarding Greece and the EU rescue plan.

While the Greek PM survived a confidence vote the euro will remain susceptible due to a lack of detail about the rescue plan in as well as the actual mechanics for leveraging the bailout fund.

In terms of headline data this week we have German industrial production which is expected to show a slowdown in activity and could prove unhelpful for any kind of euro rally.

The under fire Greek Prime Minster George Papandreou sensationally performed a u-turn yesterday by cancelling his controversial idea of a referendum into whether the Greece should accept the latest bailout package. This has left the Greek government on the brink of collapse as infighting has led to the PM losing his majority.

The political skirmishes spread to the latest G20 summit in Cannes where numerous politicians have balked at the idea of putting up more cash to support the ailing Eurozone economies through the IMF.

The main discussion of the summit is whether to double the size of the International Monetary Fund.

Prime Minster David Cameron has maintained his view that it was in Britain’s economic interest to offer to underwrite billions of pounds in IMF loans.

Even if Greece can avoid default through its current bailout and the support of a beefed-up IMF, world leaders have for the first time spoken about the possibility of Greece exiting the Euro.

French President Nicolas Sarkozy said it was up to the Greek people to decide their future- through his clenched teeth.

The other big announcement yesterday came in the shape of the latest ECB rate decision.

New President Mario Draghi surprised the markets by cutting the base rate from 1.5% to 1.25% in a bold move looking to increase growth across Europe.

In the subsequent press conference, the new president discussed inflation in the Eurozone stating that it is currently over 3%, but will fall below the target level of 2% in 2012.

At least one more cut is predicted over the months ahead as the ECB continues to battle a rapidly worsening economic outlook.

Last night’s Fed Reserve meeting and Greece’s continuing struggle did nothing for risk appetite during Asia trading hours. The Reserve reemphasised the downside issues to growth and reduced its overall forecasts.

On a positive note, the Fed did acknowledge the possibility of easing options, suggesting additional QE thus giving a helping hand for risk appetite.

On the eurozone front- European politicians increased pressure on Greece by stopping the latest €8 billion aid payment and threatened to slash all financial aid if the country’s referendum now scheduled for December 4 fails to support the latest EU rescue package.

During yesterday’s emergency meeting, the Greek PM also revealed that the referendum will have a dual role; to decide the fate of the rescue package and also to ask if Greece wants to remain in the eurozone.

Of course, Greece is not the only Eurozone country under the cosh with the Italian political situation continuing to spiral out of control, as Berlusconi fails to push through legislation on structural reforms ahead of the G20 meeting beginning today.

It is questionable how long the risk rally will last, with the Euro, commodity and high beta emerging market currencies coming under further pressure.

While the urgent market focus will be on the G20 meeting starting today, the fact that leaders are now looking at the scenario of a Greek exit from the Eurozone while taking a tougher stance on the country emphasises how significant the referendum will be.

Until the referendum takes place, investors will remain highly sceptical and further risk aversion will remain.

As a result, risk assets are set for further declines.

Furthermore, as China has so far downplayed the scenario of addtional bond purchases from the EFSF bailout fund suggesting there will be no help from the far east any time soon.

A number of negative factors have meant risk aversion has come back with a vengeance. As usual the eurozone is under the spot light and last week’s European Union (EU) rescue agreement has failed to prevent a further widening in eurozone peripheral bond spreads.

This will be disappointing to eurozone officials as this was the main ambition of their latest deal. The deal struck by EU officials has failed to avoid a leap in Italian and Spanish bond yields.

Furthermore news that MF Global has filed for bankruptcy while the Greek PM has called for a referendum on the EU’s debt deal dealt markets a blow overnight.

As the plans announced last week didn’t really contain any concrete details over the workings of the package this has left traders questioning the ability of this latest deal.

The single European currency has lost a considerable amount of its gains from last week as various doubts about the eurozone rescue package have come to a head.

As worries had been spreading due to the lack of detail in the rescue package, including but not limited to the lack of details regarding the leveraging of the EFSF bailout fund.

The trend appears to have followed the reaction to previous EU announcements to stem the crisis, namely short lived euphoria followed by a sell off in risk assets.

The EUR is likely to struggle further over the near term, with the current pull back likely to extend and breach through 1.37.

So far today we had UK GDP which came out slightly better than expected at 0.5% q/q and y/y against a median forecast of 0.4% respectively.

Despite the positive number a weak PMI figure of 47.4 against the forecasted figure of 50 (worst since June 2009) has pushed cable lower and currently sits at 1.5931.