WISE MONEY

Italian borrowing costs soared yesterday following new concerns about their ability to reduce its high levels of debt. In the latest auction the Italian government paid an interest rate of 3.89%- up from 2.76% last month and this has been against the recent trends but investors are becoming increasingly sceptical over Italy’s and Spain’s ability to reach deficit targets.

As a result newly elected governments in both countries have announced austerity measures to reach strict debt reduction targets.

Coupled with these figures, Greece published its latest unemployment data yesterday indicating a further rise with the overall rate pushed to 21.8% up from 14.8% at the same point last year.

Despite the bad news the euro remains towards to the higher of its recent trading range against the US Dollar currently trading in the high 1.31s and Sterling trades just above 1.21 at 1.2104.

So far this morning China has published its latest growth figures revealing the world’s second largest economy has grown at its slowest pace for nearly three years.

GDP increased by 8.1% down from 8.9% in the previous quarter and below expectations of 8.3%.

The numbers are being blamed on the fall in demand for exports from the Europe and the US and consequently we could see risk assets hit hard today.

To end the week we have the Michigan confidence figure, which assesses consumer confidence on personal finances, business conditions and purchasing power based on telephone surveys and provides a real time assessment of US consumer sentiment.

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.

Encouraging economic developments provided wise money markets with an appetite for risk again. Despite weaker than expected US durable goods orders, a rise in US consumer confidence to its highest since February last year provided stock markets and risk assets with an overall a boost.

It was a similar story in Europe as Italy held a successful auction of 10-year debt at a lower than expected cost at the same time as Portugal approved a third review of its bailout agenda.

However, there was some negative news, with the ECB momentarily deferring the eligibility of Greek bonds as security for its backing and Eire calling a referendum on the European fiscal compact.

Nevertheless, expectations of a strong take up at today’s ECB second 3-year Long term refinancing operation (LTRO) should keep markets on the straight and narrow for the rest of this week.

As for the US Dollar and given the upbeat equity market mood overnight it is no shock that the Greenback was on the slide as the euro appears determined before today’s 3-year LTRO by the ECB.

Bernanke’s Semi-Annual Monetary Policy Report later today will provide the Dollar some bearing but no major surprises are expected.

The euro will continue to rally against the US Dollar if we are correct about a strong euro 600-700 billion take up at the LTRO but it will interesting to see if the 1.35 level can be breached.

A new shockwave filtered through the markets on Friday as the credit agency Standard & Poors (S&P)- downgraded France, stripping them of its prized AAA rating. The decision to remove this vital asset in keeping borrowing costs to a minimum left France with a AA+ rating, a judgment that will likely cost billions in higher repayment costs.

S&P said “Europe’s austerity and budget discipline alone were not sufficient to fight the debt crisis and may become self defeating”.

Alongside France, S&P cut the rating of Italy, Spain, Cyprus, Portugal, Austria, Slovakia, Slovenia and Malta though it was expected that these countries would have their ratings lowered.

Overall, the picture isn’t looking good for Europe and with further downgrades likely over the next few months, it will be important to see how the ECB reacts in keeping this ongoing debt crisis under control.

The main winner from this continues to be the US Dollar with further gains against most currencies likely as investors pile more money into the global reserve currency.

For as long as the Greenback keeps this status, it will remain the market leader in these testing times as Europe sits on a knife edge between growth and recession.

There is very little data out today with the only comment of note coming from a speech by ECB President Mario Draghi due at 6pm UK Time.

It is likely he will focus on the downgrade on France and how the ECB will look to repair the damage it has caused.

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.

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.

A fresh wave of negative sentiment swept the wise money markets caused by doubts over euro banks’ capital raising plans and Hungary’s solvency.

This led to investors selling shares in the continent’s major lenders. Italy’s biggest bank, UniCredit saw its share price fall by over 17% after it announced a heavily discounted rights issue, which valued stock at less than a third of it current price.

Over in Hungary, the yield on 10 year bonds soared to over 10% after the government failed to find enough buyers for the 45bn forints (£116 million) of sovereign bonds it was trying to sell. This combination of weakness in the Eurozone led to the single currency dropping to 15 month lows against Sterling.

This weakness in Europe was countered by positive data from both the UK and US.

The UK’s biggest sector, services ended last year on a high while America’s efforts to improve their jobs market showed signs of progress.

The US private sector added 325,000 new jobs in December and the non-farm payrolls are due out today with a rise of 150,000 jobs expected.

Overall, it has been a simple week for the markets with the euro continuing to be weak while the US Dollar remains the strongest of all as investors put their money into the global reserve currency.

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.

The Italian treasury released a small positive for the global markets this morning by announcing good demand of their latest bond auction. With the Italian debt market being the most closely monitored amongst all of Europe, these comments brought some relief to the recent run of weakness in the single currency.

The euro is by no means out of the woods, but at least it is potentially the start of a period of euro stability.

This followed yesterday’s reports that the IMF is planning a €600bn package to help Italy and a credit deal for Spain could be in the pipeline.

These rumours were played down by IMF Chief Christine Lagarde who stated that “the IMF can only make loans available when a government asks for them” and as yet, Italy hasn’t.

The euro has strengthened slightly off the back of this news though we are very far away from a long term resolution so any real gains for the single currency are unlikely in the short term.

Reports out today stated that the UK will fall victim to a second recession.

The consensus, by a leading economic forecaster warned that the rise in unemployment will further damage Chancellor George Osborne’s hopes that he will be able to meet his deficit reduction target.

The figures will make grim reading for the chancellor, who will deliver his Autumn Statement today.

This is followed by more bad news for the UK recovery with millions of public sector workers walking out on strike tomorrow; a move that will cost the economy an estimated £500m.

The markets will continue to move on any more news from the struggling debt nations and on any bond auction updates from the eurozone.

The week ends with the non-farm payrolls figure from the US which is always viewed as a key indicator for how the global jobs market is performing.