WISE MONEY

The euro enjoyed its first strong day of 2012 yesterday with signs that some confidence could be returning to the single currency. One of the main topics of discussion at the moment is the ongoing Greek debt deal.

Negotiations had taken a turn for the worse over the weekend after the authorities asked investors to accept new bonds yielding 3.5% rather than the previously agreed 4%.

The Greek government had hoped to complete talks by Monday, but as yet, no agreement has been made.

However, Greek finance minster Evangelos Venizelos said progress was being made and this was one of the main reasons for the euro strength.

He has now set a new date of 1st February to conclude talks.

Although these comments have improved the confidence level of a deal being agreed, until any deal is signed, expect the euro to remain weak as the threat of a default is still alive.

The Bank of Japan kept their interest rates fixed at 0.1% as the bank noted that the Japanese recovery is moving slower than expected.

The strong Yen remains a problem for the economy with corporate revenues likely to be down as a consequence.

The ongoing debt problems in the eurozone remain the biggest risk to the Japanese economy.

Sterling has remained in the middle against its major rivals as the euro strengthened against both the Dollar and the Pound dragging Cable higher with it.

The main news out this week for the UK is the release of 4th Quarter GDP with a -0.1% figure expected.

This significant change in momentum has been priced into the value of the Pound though it will be a massive blow to the global recovery and could be the first of many negative GDP figures from around the World as a second recession starts to bite.

Against all the odds the single European currency has been resilient this week moving up towards the year to date highs of 1.3068, clawing back its losses and more.

The euro’s ability to defend bad news in Europe has been remarkable and its gains have reflected a speculative market that has been extremely short.

As we are light on headline data today the markets will have to observe the outcome of the somewhat positive Spanish and French debt auctions while keeping one eye on Greek debt talks with private investors.

But for yet another failure of talks in Greece the EUR should continue on a positive footing.

How long this will last is uncertain, particularly given the dangers ahead but at a time when investors have become progressively more bearish on the euro it may just extend its bounce over the short term.

One country to watch is Portugal whose bonds have underperformed recently as markets speculate that it could be the next contender for any debt note.

Back to the UK and Retail sales have come been announced close to median forecasts of +0.6% m/m and +2.6y/y.

Sales have improved in December but the improvement is likely to be short-lived, suggesting any support to the Pound will be brief.

Sterling has underperformed even against the firmer EUR of late but this is supporting better levels for the market to take long positions versus EUR.

This explains the move in relative European/US interest rate differentials, which has been linked with the move in EUR/GBP.

Overall Sterling could outperform EUR over coming months to around 0.80, with the former continuing to benefit from the simple fact that it is not in the Eurozone and has therefore acquired a quasi safe haven status.

After markets closed last night, Standard and Poor’s (S&P)  the credit rating agency dealt a severe blow to the European bailout fund by downgrading its AAA status to AA+. The agency blamed the large number of guarantors that had lost their triple A crown and therefore the funds itself could not maintain the gold standard rating.

Following the announcement, EU officials attempted to reassure markets that the funds will not change is ambitions to lend billions of Euros to struggling Eurozone states.

Proving how out of touch euro technocrats are the EFSF chief Klaus Regling claimed “The downgrade to AA+ by only one credit agency will not reduce EFSF’s lending capacity of €440 billion”.

This latest downgrade will increase pressure on Eurozone officials and German government to boost their contribution to the European Stability Mechanism which only becomes active in July.

Interestingly the euro has rallied so far following the announcement and currently sits at 1.2021 against Sterling and up against the Greenback at 1.2790.

This morning in the UK we had the latest CPI reading which indicated a 4.2% year on year according to the Office for National Statistics.

This is further fall following last months 4.8% figure and eases inflationary pressure on the Bank of England as it creeps lower towards the 2% target level.

This is the biggest year on year decline since April 2009, which was attributed to discounts on petrol gas and clothing according to the ONS.

The US re-opens today following its Bank Holiday for Martin Luther King day yesterday.

They start their week with Empire manufacturing data which assesses business conditions and expectations of manufacturing executives specifically in New York.

This is followed by a Canadian Interest rate decision where we are expecting them to maintain interest rates at 1.0%.

Friday afternoon saw the US economy post 200,000 new jobs in December, making that the sixth consecutive positive month according to official figures. This came much higher than the anticipated 150,000 jobs and reduces the overall unemployment rate down from 8.7% to 8.5%.

The main areas of job growth were seen in retail, manufacturing, transportation and warehousing and healthcare.

The news did not help the euro’s cause as it continued its decline against the Greenback falling below under 1.27 for the first time since autumn 2010.

US markets also struggled with the Dow Jones and S&P 500 indexes both closed lower as they remain concerned over the eurozone debt crisis.

The report did however provide some political collateral for the Obama Administration during an election year and said the US economy was “moving in the right direction”.

Over to Europe and Mario Monti the Italian PM has asked for all his European counterparts for their full support in implementing austerity measures to stabilise the Euro. “Europe needs to put into action common and coordinated growth policies on financial stability”. His comments came ahead of the Franco-German summit today in which Sarkozy and Merkel will attempt to strike out a unified position in the eurozone.

One will look to this summit to provide impetus on Euro trading in the early part of this week.

Sterling currently down slightly on last week at 1.2084 and the euro against the Dollar is trading at 1.2771.

A busy end to the week in the US, with all eyes on important December US Retail Sales number.

Will we see a continuing uptrend on this latest US number… early signs that it’s a similar story to UK in the retailers posting slightly disappointing numbers.

World money markets ended off a wild and difficult year in 2011.

The UK FTSE 100 fell 5.6% in 2011, while France and Germany stocks saw falls of 18% and 15% as growing fears for the survival of the euro took their toll. But US stocks ended the year up.

The Libyan revolution saw the oil price surge in the first half of the year, while the gold price set a new record high as investors sought its safety.

Meanwhile, the euro ended 2011 close to a 15 month low against the dollar. The eurozone crisis has had a massive impact on global markets, as investors nervously await a plan to ensure Italy’s government can continue to support its enormous debts.

The US and Europe, including the UK, have also come to accept that it may be many years before their heavily-indebted economies regain their former dynamism.

Financial markets started 2011 in an optimistic mood. However, this was dramatically halted in the summer after the US lost its top AAA credit rating, following political deadlock in Congress over raising the country’s debt ceiling – the legal limit on the federal government’s total borrowing.

Much of the year has been dominated by the euro crisis, which came to the boil in August.

With fears over the future of the eurozone, many analysts say it could drop even further in 2012.

Of the heavily-indebted so-called PIIGS (Portugal, the Irish Republic, Italy, Greece and Spain) countries, Irish shares fared best.

France and Germany look likely to bear the brunt of the bailout costs for the southern European states – and this was reflected in the performance of their equity markets.

France’s Cac 40 dropped 17.5% and Germany’s Dax fell 14.7% over the year.

By contrast, the German market was the best performer in Europe in 2010, so it marks a dramatic change in fortunes for the European ‘powerhouse’.

Overall, however, the UK FTSE 100 index is 5.6% lower on the year, having fallen from 5,899.94 to close at 5,572.28 over 12 months, with worries over the impact of the eurozone crisis doing much of the damage.

This is in marked contrast to previous years – 2010 saw a 9% rise, while 2009 saw stocks rise in value by 22% during the year.

Italy’s cost of borrowing has remained too high as worries about the eurozone debt crisis continue. The Italian government raised around 7 billion euros (£5.86 billion) of medium and long term debt today.

The interest rate on Italian 10 year bonds was 6.98%, viewed as unsustainably high by investors.

The interest rate on Italy’s ten year debt was just over 0.5 percentage points lower than the 7.56% it had to pay at its last auction of 10 year bonds on 30 November.

Economists had hoped for a larger fall to make Italy’s interest repayments more sustainable.

Italy has 161bn euros in debt repayments due between February and April, all of which it will have to finance through new borrowing.

The auctions were the first since the European Central Bank provided European lenders with 489bn euros of its new three year loans just before Christmas.

Just over half of the money was used to service banks’ existing debts leaving lenders with around 190bn euros in spare cash to invest elsewhere, possibly including government bonds.

The injection of money into the banking system may have reduced Italy’s short term borrowing costs.

Following the auction the euro fell to its lowest level against the dollar for 15 months, at $1.287, ending at $1.29 on Thursday.

European markets closed up on Thursday despite the concerns over Italy’s financial future.

The FTSE-100 ended 1.08% up, while the Paris CAC rose 1.84% and the German Dax edged up 1.34% at the close.

Banks jumped at the chance of “free money” yesterday as the European Central Bank flooded the markets with low interest 3 year loans. A total of 523 banks borrowed €489.2 billion in the ECB’s biggest ever funding exercise.

The total surged over €100 billion above the expectations as regulators encouraged lenders to take advantage of the cheap money on offer.

The upswing in demand for funding comes as Europe descends into another credit crunch where banks have been refusing to lend to each other for fear that the borrowing bank could be insolvent.

This comes as many banks have continued to write down the value of the sovereigns bonds they hold. Italian banks are believed to be the biggest borrowers as data came out revealing their economy shrinking by 0.2% over the 3^rd quarter of this year.

Apart from this, there has been very little out in the way of news or data.

With the year coming to a close, volatility on the markets has slowed and we’re expecting stable trading over the holidays.

The euro’s fallen 5% over the last month looks set to go into 2012 on the back foot with the US Dollar remaining strong as the global favourite “Safe Haven”.

Sterling has been in limbo over the past few weeks as it has strengthened against the weak currencies while losing ground to the strong ones.

The ECB is set to flood the eurozone with cheap money on 3 year loan terms.  The money will be lent at the average of the ECB’s benchmark rate- currently one percent over the period of the loan.

Basically this is free money for banks and the aim is to keep the liquidity cycle moving on to companies and households- the danger and likelihood is of course that the banks take a piece of the cake and do not share.

However the aim seems to be to sure up the banks’ capital requirements.

The euro has pushed higher against the US Dollar on speculation for this move- hitting a high of 1.3185 and yields on Spanish and Italian government bonds have dropped.

The USD which is the largest safe haven currency at the moment has also weakened on the positive news; the risk appetite currencies notably the AUD, NZD completed the cycle and gained.

Over to the UK and the Bank Of England as expected voted 9-0 to keep interest rates and Quantitative Easing unchanged in December.

Overall the MPC saw little change for growth and inflation and thus the news was largely positive for the Pound. In addition UK November public sector net borrowing data came in slightly better than expected again helping the Pound.

Looking at the markets after a crazy year we are amazingly at exactly the same levels as 12 months ago for EUR/USD and very similar on GBP/USD after much volatility in the year.

2012 will start with a heavy focus on US payroll numbers on January 6.

The US dollar has gained against the majority of its peers after confirmation came from North Korean state television that leader Kim Jong II had died of a heart attack. The US Dollar gained due to its attraction as a safe haven currency as fear is now growing that instability may arise in the region. The Yen fell against the USD as concern rose for Japan’s economy and security as destabilization of the Korean peninsula will now be a concern.

The Euro has seen no real improvement and is still floundering against the USD. This week the concern for the Euro remains that some of the regions largest economies may have their credit ratings slashed. So we have fear mode prevailing in the markets with the USD akin to gold as it soaks up demand from investors with a lack of appetite as we close the year.

The huge demand for the US Dollar as a safe haven does to a large extent dumb down the fact that the US was stripped of its AAA credit rating by S&P four months ago- maybe Europe need not worry about downgrades!

Mario Draghi the ECB president has certainly not helped ease concerns for Europe as he breached the taboo subject of discussing a Euro break up. His point in discussing was that countries who exit the euro will suffer more than if they remained.

He also sought to play down the ECB’s role in suring up the debt crisis; the financial markets are looking for a more prominent role by the ECB to effectively end the crisis and Draghi has sidestepped this potential solution consistently.

For this week, we will see final readings on third quarter growth for the US, UK and France with no changes expected. On Wednesday we have the Bank Of England minutes and the markets will be looking for more clues on further QE for the UK.

However in reality economic numbers will be of little importance this week as investors shelve risk and await the new year payroll number from the US on Jan 6.

The euro debt crisis has taken a back seat today with no comments or figures coming from the Eurozone. Maybe it’s because the various European politicians are following the draw of their premier sporting event, the Champions League and have taken the day off. Or maybe it is down to there being no news or progress with sorting out the future of the single currency.

The relationship between Britain and France took a hit yesterday as French Central Bank chief Christian Noyer lashed out at the UK’s economy saying “Britain should be downgraded before any cut to France’s credit rating”.

Prime Minster David Cameron responded by pointing out the UK’s low bond yields and the credible plan in place to cut the mammoth annual deficit.

This aside, the markets are very calm as we finish the week. The US has some inflation figures due out in the form of CPI data as well as some FED members speaking, but these will bring little in the way of movement.

The Greenback has remained strong as invested move funds into the only currency being viewed as a “safe haven” and this will likely continue into the new year as no additional risk will be wanted over the holidays.