WISE MONEY

The Bank of England voted as expected to keep interest rates on hold and this decision was achieved with a unanimous 9-0 decision implying that the base interest rates will not be rising anytime in the near future. A slight weakening factor for Sterling as an increase to the interest rate would add to the underlying value of the currency.

This hardly came as a surprise as an increase in the rate would cripple growth in what are troubled times.

The more interesting vote was the 7-2 result over quantitative easing.

Seven members voted in favour of the £50 billion extra that has been pumped in while 2 members (David Miles and Adam Posen) wanted £75 billion to be added.

This caused most of this morning’s weakness in Sterling as there is potential that more QE could be pushed into the UK economy.

The BoE also sees credit remaining tight and looks for global growth to weaken.

Wise Money had to mention the Greek saga which seems to be coming to a close, but the main talking point will be if problems re-open looking ahead to the rest of the year.

It is thought the new loan of €130 billion will cover Greece in the short term, but what will happen when that starts to run out.

Various countries that form the IMF are looking for officials from the European Union, ECB and IMF to monitor the Greek government from Athens and make sure the cuts actually take place.

Wise money markets will be influenced largely by developments in Europe to start the week, however President’s day in the US could be mean a quiet start. Ongoing US data continues to finish above expectations as shown by the latest gains in retail sales, manufacturing surveys, jobless claims and industrial production.

The overall recovery is gaining momentum and the Greenback is at last showing some signs of a rally on the news.

Increasing US bond yields have offered the Dollar some momentum, although the momentum has been curtailed by elevated bond yields elsewhere.

However, in spite of continued rumours of further Fed stimulus the Dollar appears to be somewhat on a stronger path in the short term.

In a fairly quiet week of headline data with the US being closed housing data will be the main item for digestion this week.

Over to the never ending merry-go-round of the second Greek bailout.

If approved and the deal goes ahead, the week should begin on a positive note for the single European currency.

The euro rally will be influenced by the release of flash February purchasing managers’ indices (PMI) and the German IFO business confidence survey.

On the other hand, conjecture of a Greek euro exit will not recede swiftly and investors will likely revolve between ‘risk on’ and ‘risk off’ based on the latest views from Greek or European officials.

Everyone should hold on it could be a rollercoaster ride this week.

The money markets entered Friday in limbo as investors and traders await the latest news from talks between Greek officials and Europe. Hope rose overnight as comments of “We are almost there” were stated.

The general view is that an agreement has to be reached as the deadline for Greece to receive the latest transfer of EU/IMF funds to avoid a default on its loans closes in.

A default would be catastrophic for Europe with the ECB potentially having to support the banks that have purchased Greek bonds.

Otherwise, these banks could become insolvent and that could lead to a second credit crunch in the Eurozone.

Earlier today, we had the release of January’s retail sales figures for the UK showing a 0.9% jump on the previous month.

Obviously, the sales will have been affected by the slashing of prices by stores over the period after Christmas and this has been taken into account as Sterling hardly moved on the back of this number.

The fact that the second bailout for Greece appears to be stalling means markets will remain anxious, leaving risk assets susceptible to further falls. The Greenback will be the main benefactor in these conditions.

Poor Eurozone growth figures for Q4 2011 released today will compare with relatively firm data including industrial production and the Empire manufacturing survey in the US, leaving the story of US economic recovery unharmed.

The single European currency has lost some momentum and looks open to to additional falls lower.

The fact that EU finance ministers have cancelled a summit due to be held today means that markets will have to extend their wait for an agreement on a second bailout deal for the Greeks.

Reports that Greece’s political leaders will send a pledge to European officials today that they will apply more austerity measures will provide some hope that things are moving in the correct course but an ominous cut-off date for debt redemption in March will mean increased anxiety.

Investors are still shorting euros although positions have moved close to its 3-month average suggesting less potential for insistent short covering.

After the downgrade of ratings of several Eurozone countries yesterday and the drop in Q4 2011 Eurozone GDP today, prudence will be the common theme today, leaving EUR/USD on the defensive and opening the door for a test of technical support around 1.3026.

So far today Sterling has fallen against the Euro and the USD following disappointing unemployment figures.

UK unemployment rose by nearly 50,000 to 2.67m with an overall rate of 8.4%.

Figures from the Office for National Statistics indicated that the average earnings rose by 2% until December which was unchanged.

These figures are well below the inflation rate and mean a continued squeeze on consumer spending power.

Amid wide scale protests, the Greek Parliament finally passed further austerity measures needed to secure another tranche of funding from the EU and IMF. Not surprisingly the euro rallied overnight in the Asian session and is holding onto gains in early trading this morning.

Dissenters within the pro government parties were ousted, the conservative New Democracy party expelled 21 of 83 deputies with the Socialist PASOK party throwing out another 20 of its 153.

A warning from the Prime Minster that Greece was approaching “Ground Zero” applied enough pressure to get the vote through quite comfortably in the end, but how long the Greek political system can hold up in such harsh conditions is unclear.

There is rising support within Greece, and if you believe reports from the Germans too, for a withdrawal from the euro completely.

Whether they are pushed by the Germans, leave on their own terms or by a combination of both, indefinite austerity imposed by outsiders will eventually become too much for the Greeks.

This vote may mark the half-time interval for the Greek saga, the real fireworks are yet to come.

The U.K. Economy will avoid a double dip recession according to the CBI, but only just.

John Cridland, Director General of the CBI, estimates growth to be 0.2% in the first quarter, keeping the UK economy out of technical recession.

An optimistic forecast in our opinion, but the CBI are very well respected in the market and positive news is thin on the ground at the moment.

The Bank of England inflation report is announced on Wednesday and is expected to show a sharp drop in inflation and mirroring the Bank’s forecast late last year.

Sterling is unmoved from Friday against the Euro and Dollar, the QE announcement was almost fully built into the price beforehand.

Politicians in Greece have at long last approved austerity cuts totalling €3.3 billion in order to secure a second bailout deal. Official talks now focus on the particulars of the bail out package, specifically a cut in Greece’s debt to GDP ratio to120%.

Nevertheless, the fact European Finance Ministers have suspended additional funds for Greece with the expectation that measures will be implemented, suggests there is the prospect for further uncertainty.

A Greek government vote is set to begin over the next couple of days, may see some advancement but investors will trade carefully ahead of the vote.

EUR/USD rallied to a high of around 1.3322 but failed to break above its 100 day moving average at 1.3332 following the contract.

As expected the ECB offered no help to the EUR, with market interest continuing to centre on the second 3-year LTRO on 29 February.

As the Euro continues to face against a backdrop of issues any upside for EUR could be limited in the short term. In any case the currency was already pricing in a lot of good news. EUR/USD will face major resistance around 1.3388.

Remarkably, risk measures are moving higher once again, providing some pressure on risk assets in the near term.

Markets today will digest the expected injection of £50 billion in quantitative easing from the Bank of England.

The wise money thinks the Greek government are finally close to a deal with private and official sectors judging by the late afternoon surge in the euro yesterday. The Euro-Dollar pushed back above 1.32 driving Sterling –Euro back through 1.20 and cable above 1.59.

Whether this turns out to be the good news that the market is currently expecting, or another short term rally followed by a painful pull back remains to be seen, but there is reason to remain sceptical given the number of times over the last two years news about a Greek rescue deal moved the market in exactly the same way; Euro positive on the rumour, retracement on the fact.

The deal was supposed to be done and dusted by yesterday night, but yet another delay blamed this time on the late arrival of the official documentation means we are still waiting for official confirmation.

Putting geopolitics aside for a second, we have the rather important central bank meetings tomorrow in the UK and Euro-zone.

It’s unlikely that ECB President Mario Draghi will be drawn to comment in any detail on the Greek deal, and with no change to interest rates expected the European leg of the meetings should spring few surprises.

The Bank of England are expected to inject another £50bn via gilt purchases into the UK economy. It would come as a great shock to the markets if they did not commit to further easing given how dovish recent minutes and communication from MPC members has been.

The money markets are on tenterhooks today as we wait for an announcement from Athens over the Greek debt deal. The talks which are being led by the IMF, ECB and Greek authorities  has yet to conclude as the parties try to find common ground.

From the investor’s point of view who purchased these bonds, they will be looking for a minimal cut as they have already suffered a 50% haircut on the value.

However, they will realise that any cut which doesn’t reduce Greece’s exposure substantially will be meaningless as it would most likely lead to further talks or a default in the near future.

The announcement is expected later today and will be the main factor in determining where the currencies move over this week.

If the news is positive with a major cut taken by the private investors, expect a surge of Euro strength as the likelihood of a Greek default will fall away.

On the other hand, no news or a negative result will lead to another surge of euro weakness.

Either way, the biggest move will likely be seen in the Eurodollar pairing as it is the most traded combination.

Sterling is likely to remain relatively stable over this week with only one figure or announcement of note due.

That is Thursday’s Bank of England interest rate decision which is expected to reveal no change from the current 0.5%, but also no addition to the current level of quantitative easing.

Wednesday trading began where it finished on Tuesday with the euro still tittering on a knife edge while Euro leaders wait for an agreement to be reached over the Greek debt deal. Discussions have been taking places for weeks now with Greek Finance ministers trying to arrange a significant cut in their debt to GDP ratio. Comments from these meetings have been released on a daily basis with the latest remarks stating that talks will conclude “very soon”.

However, until this is signed off, risk to the euros future still exist with the potential for a Greek default growing with every week that the Greek debt isn’t cut.

The other major story around at the moment involves the Swiss National Bank’s strong stance of protecting their currency and its 1.20 peg against the euro.

Traders have been testing the 1.20 level and as yet, the SNB hasn’t budged, but expect to see them move if 1.20 is broken as a strong Swiss Franc is really damaging their recovery.

Today is a relatively data light day with the majority of focus surrounding the Greek and Swiss situations.

Look for the US Dollar to strengthen on any negative comments from the debt discussion and investors will panic and run back into the safe haven at the first sign of trouble.

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.