WISE MONEY

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.

Wise Money says keep your hard hats on-  the crazy levels of volatility across the FX markets will continue today as we look forward to the US employment number this afternoon. It will be nice to get back to economic data driving moves in currencies, given trading has been totally dominated by central bank announcements and political news hitting the wires.

In no particular order, the market moving events have been US Fed Chairman Bernanke speaking yesterday, the Chinese premier suggesting they may invest further in the European bail-out fund (after a quick whisper in the ear by German Chancellor Angela Merkel) and the will they won’t they saga still playing out over Greece.

Throw some disappointing American data into the mix, stir together and sit back and watch the Euro-Dollar move like a yo-yo.

The Bank of England arch dove Adam Posen has long argued for more QE before it became fashionable again, and he suggested yesterday than the Bank should not stop at buying Gilts in the easing process.

Mr Posen thinks corporate debt should be included in the debt the bank buys, as the current mechanism supposed to lower rates on corporate debt is broken because the banks just park newly minted cash on their balance sheet and shun assets perceived as higher risk.

The BoE are expected to announce another £50 billion of QE at their meeting next week, but it will be gilt only.

It will take time, a considerable change in thinking in the Bank or a serious deterioration in the economic climate in the UK for Mr Posen to get his way.

The expectations this afternoon are for the US economy to add around 150,000 jobs in January, lower than December but expected by the market because of the effect Christmas has on the job market.

As we mentioned before, the way the US Dollar reacts to positive data is changing from risk-on, risk-off to the complete opposite, where the Dollar rises on positive data.

Trying to guess which way the Dollar moves this afternoon is becoming increasingly difficult, which means trading will be choppier than usual in the build-up and immediately after the announcement.

Rising bank shares have lifted European stock markets amid hopeful economic signals, results from US banks and a report suggesting the ECB was providing more loans to banks than had been thought.Successful French and Spanish bond auctions and falling US unemployment claims also helped improve sentiment.

Bank of America and Morgan Stanley’s results were better than expected.

Commerzbank shares rose 15% after it said it would be able to increase its capital without government help. Also in Frankfurt, Deutsche Bank rose 8%.

In London, Barclays shares rose 10% while Lloyds and RBS were both up 9%.

In Paris, Societe Generale rose 13%, Credit Agricole rose 9% and BNP Paribas gained 8%.

The soaring bank shares helped Europe’s benchmark indexes to strong closes, with the FTSE 100 ending up 0.7% at 5,741 points, its highest closing level since the start of August.

The Cac 40 in Paris closed up 2% while the Dax in Frankfurt gained 1%.

Some of the gains in banking shares were sparked by a report from Morgan Stanley, which said that the European Central Bank was flooding the eurozone banking system with even more cheap loans than had previously been thought.

The British economy is expected to stagnate in the first half of the year according to the British Chamber of Commerce (BCC), with at least one quarter of negative growth expected. A technical recession, two consecutive quarters of negative growth is still a distinct possibility and the BCC warn the UK economy is still in a precarious position.

The government needs to make important decisions and actually act on them to maintain confidence and investment levels, which as promised in the Chancellor’s autumn statement included improving the flow of credit to businesses and infrastructure projects.

Although we are about to see another high speed rail line announced today, the BCC warning is timely, and will hopefully persuade the government that expansionary austerity is not delivering the results that the OBR and Chancellor were hoping for.

The Bank of England has long been suggesting monetary policy cannot be the only tool to lift the economy back towards levels of activity seen before the financial crisis, and will be firmly behind the BCC’s suggestions.

In the MPC meeting on Wednesday and Thursday the main discussion will be whether to expand the QE program.

Further stimulus is probably on the cards, the only question will be when the Bank acts.

For the Pound this means it will come under further pressure against its major trading partners especially the Dollar, which is being boosted from a decent data flow in recent weeks.

With the ECB unlikely to drop interest rates again, the main focus on a busy Thursday will be the exact phrases new ECB chief Mario Draghi uses in his press conference.

The strange relationship between the markets and the head of a central bank means every word uttered is scrutinised in microscopic detail to try to second guess the central banks next move.

Special attention will be given to Mr Draghi when he talks about the ECB plans for bond buying in the secondary market and/or any plans for large scale money creation which it is under pressure to commence but has not yet done so because of intense German opposition.

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.

European finance minsters are struggling to finalise a plan to give extra money to the IMF, with the plan then to lend the money European governments. The hope was for €200bn to be pledged by euro Area governments plus money from those outside of the Euro including Britain and Sweden, but the amount committed so far is only €150bn.

Britain, quite rightly, feels since the IMF is a global institution any increase in funding should be global in nature and not confined just to European countries.

The constant disappointment the markets are showing over the lack of any clear resolution is keeping the Euro depressed and stock markets on the back foot.

Traders hoping for a Santa Claus rally look set to be disappointed as the markets wind down into Christmas.

You can tell the various statistic agencies are also preparing for a two week break, as data releases this week are few and far between.

The Bank of England minutes are due tomorrow and continue to be important in gauging when the MPC will expand its QE program, currently expected to be early next year.

Finalised Q3 GDP numbers are also due on Friday expected to show 0.5% growth, not enough to stop the UK re-entering a technical recession in the first quarter of next year.

US Q3 GDP is also due on Thursday along with durable goods orders which will almost certainly show the US economy plodding along at a rate neither low enough to force the Fed to act or improving enough to warrant withdrawal of the current monetary stimulus.

Expect the Dollar to hold on to its strength into the New Year.

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.

In light of further warnings by S&P the ratings agency on the possibility of downgrades to a whole host of European banks as well as the triple-A rating of France and Germany, the wise money markets are beginning to ask if the rating agencies actually matter any more. Why are they six months late to the party?

The market has been asking questions about the health of European banks for long enough for it to be widely accepted, even by the general public.

John Heimann, former vice chairman of Merrill Lynch, suggests the function of the rating agencies is to “visit the field at the end of the battle and shoot the wounded”.

Let’s hope the market shrugs of the news as quickly as the announcement earlier in the week and moves onto the more pressing matters of an ECB interest rate decision today and the announcement tomorrow over further fiscal integration of the eurozone.

Regarding the latter there was fierce debate in the House of Commons yesterday over how any treaty changes would impact on the British economy with several Tory’s including the Mayor of London calling for a referendum on the matter.

The two day meeting has not started but Britain has already been told off by Jean-Claude Juncker, head of the group of euro nations.

He was quoted as saying he does not want the UK setting aside entire pages to say the UK will not do what the others have to do.

Sterling remains relatively unchanged as a storm blows around it, but that may change against both the Dollar and Euro if the ECB, as expected, cut interest rates again.

The Bank of England is certain to keep rates unchanged but may increase the size of the asset purchase scheme (QE) in reaction to the slowdown in the British Economy.

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.