WISE MONEY

The euro continues to underperform especially against the US Dollar and the Japanese Yen- where it hit a two month low. There is a growing concern that rating agencies will downgrade European sovereigns in the near term.

In addition the lack of a clear plan moving forward from the EU summit is denting confidence in the single currency.

The market was also fearful in advance of this morning’s bond auctions from euro sovereigns- it is understood that appetite was ok but there was rumours of a little help from the ECB.

Asian stocks have also declined in line with the growing concern for Europe.

The key level for EUR/USD is the 1.31 barrier- a move below this level could open the door for a push under 1.30; this would help GBP/EUR push towards the key 1.20 level.

Data from the UK was largely ignored with UK CPI coming in for November at + 0.2%, that is + 4.8% year on year- this was largely in line with expectations.

Following last week’s isolation from Europe- so far the Pound has reacted positively.

The Pound could actually perform better moving forward; last week we saw the European Central Bank cut interest rates again and we now have the threat of downgrades for European sovereigns.

One aspect the UK government has managed is to be clear in their strategy to the markets- the austerity plans for the UK have been very clear for some time and this has helped to sure up the UK’s AAA status.

It may transpire of course that enforced austerity was the wrong call but for the markets the UK has embarked on a course of action with clarity.

In the eurozone it has been a prolonged mess and we are still no nearer to seeing a full solution- this could spell further problems for the Euro and as a result the Pound could shine.

The UK markets are AAA, have high liquidity and recently bond yields have fallen indicating more demand as a safer shore.  In the unlikely event that the Bank of England ceased their QE programme, then the Pound could come to life.

After the blow to the euro following the Standard and Poor’s ratings news on Eurozone countries, the currency has managed to regain some form of stability ahead of the EU Summit commencing tomorrow. Hopes that the Merkozy French -German deal which was publicised on Monday will be finalised at the summit are high and the threat by S&P means that the stakes are getting higher should there be a halt in progress this week.

Apart from placing the ratings of fifteen Eurozone countries on negative watch, S&P stated that the EFSF bailout fund may be downgraded too.

The single European currency however, looks to have found form in advance of the summit and the ECB meeting tomorrow, as news of talks to structure the bailout fund into two separate forms looks to strengthen the currency.

In other news the decrease in the Royal Bank of Australia’s new cash rate applied further pressure on the Aussie.

It’s fair to say the timing of the cut was not fully expected however the Aussie drop was restricted by the somewhat neutral RBA policy report.

The announcement did not support the idea of additional easing in the months ahead coupled with the much firmer than expected Q3 GDP this suggests that markets are too dovish on Australian interest rate expectations.

The Euro has continued to fall lower against Sterling in recent times whilst teh Pound looks to have settled into a range.

Sterling sentiment has clearly deteriorated over recent weeks as reflected as the market looks to becoming increasingly short.

The Pound has not been helped with a run of particularly poor data  and yesterday’s UK house price data was no exception, indicating a fall in November house prices alongside retail sales which dropped more than expected.

We are set for an extremely busy and important week for the eurozone.The main event looks set to be the announcement of a deal on fiscal union between member states on Friday night, but what the market expects this deal to look like and what the deal actually looks like may well turn out to be two different things.

What the euro needs is further fiscal integration between members with the plan of a centralised treasury to eventually raise and distribute taxes.

What the French and Germans are likely to propose is the fiscally stronger countries get a greater say in how the weaker periphery run their economies.

Thursday sees the ECB monthly meeting, with another reduction in interest rates expected.

ECB head Mario Dragi has also hinted in a recent speech of large scale bond purchases by the bank.

The much softer tone suggests a deal on government budgets might be closer than the market thinks.

Keeping with all things Europe, we also have a large amount of data to digest this week including eurozone retail sales, German CPI and the closely watched ECB monthly report which will detail the size and scope of lending to European banks by the central bank.

Sterling continues to hold its ground versus the euro and Dollar despite the dire announcement by the Chancellor last week, who downgraded his growth projections for the UK economy.

The resulting changes to the UK outlook now mean the Government will not balance its books until 2016 at the earliest.

The reason for Sterling not pushing lower in the face of a worsening outlook is probably that it is the least bad option in the face of the continuing European problems and the potential for QE3 in the US.

That said the Bank of England looks set to announce an increase to its own asset purchase scheme on Thursday at the MPC meeting.

Governor Mervyn King was in very gloomy mood as his announcement the Banks financial stability report last week and it is likely that the BOE will take action this month rather than waiting for the New Year.

Fairly dovish comments by Bank of England officials and weak data will keep the Pound on the back foot over the short term. BoE governor King highlighted the risk of an inflation undershoot while Fisher noted that the BoE expanded QE by a minimum in October and can do more.

Yesterday’s Autumn statement was a mixed bag for the markets.

George Osborne announced two more years of austerity measures following official figures indicating that the national debt was spiralling out of control due to rising unemployment and flagging economic growth.

Fitch reacted by suggesting that the UK was now the most indebted AAA country in the world with the exception of Uncle Sam who lost their full status earlier this year.

The Greenback was dealt a blow by Fitch, the rating agency, as they changed their outlook on the US AAA long term rating to negative.

Nevertheless, Dollar reaction has been strong, with long positioning moving to multi week highs.

The Dollar could face a struggle from the rumour that the Fed is about to embark on a fresh round of QE by buying mortgage backed securities.

The strong start to the week in terms of risk appetite aided a brief Euro rally but the currency remains susceptible to event risk.

High among them the Eurogroup and Ecofin meetings this week, which will decide whether or not to approve Greece’s next loan tranche as well as EFSF leveraging options.

Development is expected to be restricted leaving the euro defenceless to a fall.

Under the spotlight today will be Italy’s sale of up to EUR 8 billion of Italian Bonds and the likelihood that the country may have to face a yield above the critical 7% threshold.

An increase in funding costs will not bode well for EUR sentiment especially following warnings by Moody’s about potential downgrades to sovereign ratings across the region.

At the time of writing there are rumours of ECB again getting involved in bond purchasing.

EUR/USD failed to follow through on gains overnight but as reflected in the IMM; speculative positioning may have some scope for further short covering given that the net EUR short position reached its highest since June 2010 last week.

Nonetheless, upside potential for EUR/USD is likely to be restricted to resistance around 1.3415.

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.

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.

Greece will once again be the key driver in the markets for the week ahead as inspectors assess whether the Greek economy is on schedule to meet its debt obligations due next month and so avoid a default.European Union and IMF inspectors are set to hold a conference call today with the Greek finance minister.

Doubts are growing that Greece are still not doing enough to align with the financial assistance provided.

Politically the pressures are growing with Angela Merkel the German chancellor losing another regional election in Berlin, in addition nine out of ten Greeks are dissatisfied with the governments handling of the crisis.

Last week the euro regained some lost ground and Greek two year notes improved for the first time in two months, this followed rhetoric from Germany and France to keep Greece in the euro area.

However this week we once again hit a crunch point and we will see what the divergence is between political will and confidence in the financial markets- Asian currencies have fallen on renewed fear on Euro debt as we kick start the week.

Elsewhere, we have seen a small gain in UK house prices for September in a survey by Rightmove- the Pound has marginally improved against the US Dollar and the euro on the back of this data.

Economic data will also be very important this week following the IMF and OECD pointing to a lower global growth outlook. The highlights will be Bank Of England minutes and Public sector net borrowing from the UK.

The minutes will highlight the thought process of the MPC and the potential for more QE in the future.

The euro continued its slide in early trading this morning following on from the three cent reversal on Friday afternoon.The market was awash with rumours of an imminent default by Greece and trying to understand the ramifications of the resignation of Juergen Stark, the top German official at the ECB.

The Hellenic Republic did not announce a default over the weekend, but they did announce fresh austerity measures in a last ditch attempt to meet the strict budget targets set by the EU for 2011.

The departure of Mr Stark from the ECB is very worrying from a credibility point of view.

The ECB has been reasonably successful at managing the sovereign debt crisis by preventing a bond market rout.

His resignation because of opposition to the ECB bond buying program certainly questions the ECB’s credibility and is being reflected in the price of the Euro.

The size of the move to what at first glance, looks to be reasonably speculative is because the Euro has lost what has been propping it up; higher interest rates.

The dovish ECB press conference on Thursday took out lots of buying support for the Euro, paving the way for a large move which is continuing in early European trading.

On the back of the Euro move, Sterling has done well against the single currency, rising above 1.15 and towards 1.16 on the inter-bank market.

The Pound will have a busy week, with UK CPI and Jobless Claims due on Tuesday and Wednesday respectively, and it will continue to be pushed around by developments on both sides of the Atlantic.

This morning also saw the ICB report of the planned changes in the UK banking industry.

The main proposals are as most in the markets thought, the ring fencing of the retail operations of banks (savings, loans etc the “utility” part of the bank) from the wholesale division (or what Vince Cable the “casino” operation).

The planned separation is expected to cost several Billion Pounds per annum through higher funding costs and would be full passed through to consumers.

The changes will take several years to implement- 2017 and will hopefully be part of other regulatory changes to be announced over the coming year.

Chaos ensued across the markets yesterday following the SNB’s (Swiss National Bank) decision to announce they target minimum exchange rate to the Euro will be 1.20.This led to a huge switch with traders and investors alike scurrying to get funds out of Geneva and into other safe havens.

The US Dollar was the main beneficiary from all of the panic with the Greenback gaining between 1 and 2% across the board.

The announcement by the SNB caught the market by surprise and they are the first central bank to properly stand up for their currency.

Whether they actually had to use any of their own money to weaken the Franc or if it was other investors and banks, we will have to wait and see once traders test that 1.20 level for a reaction.

Sterling suffered yesterday as the rush from the Swiss Francs into the most liquid currencies led to losses against most of its rivals.

The Pound hasn’t recovered today with the release of the Manufacturing and Industrial Production numbers.

Manufacturing came out as expected at 0.1%, but the Industrial number was worse at -0.2%, yet another set of weak figures for the UK economy.

Chancellor George Osborne came out fighting insisting he will continue with plans to cut the UK Government’s annual deficit and rejected calls from Labour’s Ed Balls for another tax on the financial sector.

Sterling took a hit yesterday against most of its major rivals as investors look towards tomorrow’s GDP number from the UK.The estimate is for 0.2% growth over the last quarter, but traders are wary that with the recent weak figures from the UK economy, the number could be worse than the expectations.

The Pound has been buoyant recently and trading near 5 months highs though if the data does come out lower than the estimate, we could be set for a new downward trend for Sterling.

The US has had raft of data out recently with yesterday’s durable goods numbers coming in better than expected. They showed a 4% MoM increase in the number of new orders in the US which is a massive boost to the struggling economy.

The main focus for this week is tomorrow’s release of the US GDP followed by FED chief Ben Bernanke’s speech.

The expectation is for 1.1% growth in the most recent quarter from the GDP figure which would be yet more positive data for the States.

As we posted yesterday, Bernanke’s speech, coming from Jackson Hole Wyoming, he will be delivering key points for the US recovery which will lead onto the rest of the World.

The markets are looking for the Chairman to signal fresh steps to prop up the US economy with potentially more Quantitative Easing measures.