WISE MONEY

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.

The UK’s Q4 final GDP has come in at -0.3% which is lower than the expected -0.2% and is a disappointing number for the Pound which has faded lower this morning against the euro and the US Dollar.  The number is not a great surprise but more of a disappointment and will heap pressure on the Q1 2012 GDP to come.

The US Dollar remains somewhat on the back foot following Fed chairman Ben Bernanke’s dovish tone earlier in the week with rhetoric suggesting more QE could be required and the loose monetary policy stance is here to stay despite a sustained run of positive economic data.

The USD has managed to claw back a little overnight against the EUR and the GBP- this corresponds to a move out of risk on weaker Chinese data.

Elsewhere risk currencies such as the Australian Dollar have come under pressure overnight as further concerns of a slowdown in China have dampened demand for risk currencies.

February’s industrial sector profit fell 5.2% year to date, the markets will be closely watching the situation in China.

Essentially China and the US are the key drivers behind global growth and any signs of slowing growth will turn the markets into risk off mode benefitting the safe haven shores of the USD, JPY and CHF and weakening risk on commodity based currencies such as the AUD & South African Rand.

The euro suffered again overnight as reports in various papers talking up the possibility of Greece badly missing their deficit targets. The news has caused another shift out of the euro as investors have looked for safer places to invest their funds.

The articles, if proven true, will add yet more pressure onto the rest of Europe with major doubts already surrounding the success of the latest bailout for Greece worsening.

However, unlike when Greece was still seeking this bailout, the US Dollar hasn’t been the sole beneficiary.

Sterling has held its own against the Greenback by slipping back only 1 cent compared to the 3 cents it lost last time.

This is partly due to improved sentiment which was kick-started by the US with strong data realises from their jobs sector.

The UK announced its latest employment figures today with the unemployment rate remaining at 8.4%, a set of results which weren’t too bad.

Apart from this, it is another data light day with little of note being released. We can expect the US Dollar to remain strong as fears being to grow about Greece’s latest bailout.

EU officials are desperately trying to convince private holders of Greek bonds to accept a crucial debt swap deal ahead of today’s deadline. In order for Greece to receive a second bailout it will need at least two thirds of bondholders to take a 53.5% cut in the value of their holdings and the deal is considered essential in Greece’s attempt to avoid a default.

According to the Institute of Finance yesterday just under 40% of the bond holders had agreed to the new deal leading to a nervy countdown at 8pm GMT deadline later today.

If the total number of bond holders reach the required 66% (approx €150bn) agree to the swap, the government can force the other bond holders to take the haircut too.

Remarkably the euro remains relatively resilient in the face a Greek default up slightly against the Greenback reaching 1.3217.

Back to the UK and Quantitative Easing has knocked £90 billion off pension funds according to National Association of Pension Funds (NAPF).

The news came from two recent studies and blamed lower bond yields and consequently pushing final salary pensions further into the red.

Joanne Segars, Head of the NAPF, said: “Businesses running final-salary pensions are being clouted by QE.  Deficits that were already big now look even bigger because of its artificial distortions.

“Firms are legally obliged to fill the deficits, and that diverts money away from jobs and investment, and will lead to further closures of final salary pensions in the private sector,” she explained.

Finally, today we have interest rate decisions in the UK and Europe both expecting no change and consequently little FX impact.

Reduced revisions to ECB growth forecasts will however, could underpin a more negative tone in this afternoons press conference.

Greek Politicians are applying increasing amounts of pressure to bond holders in a last ditch attempt to obtain the necessary 75 per cent to agree to the terms of the looming bond swap tomorrow.  The Hellenic Republic is threatening to invoke Collective Action Clauses (CACs), agreed by Greek politicians last month, to force through the deal which if used would almost certainly constitute the first sovereign default in Eurozone history.

Any default would trigger credit default swaps on the bonds, a type of insurance that could lead to be very lucrative to those investors refusing to participate in the deal but might also lead to renewed uncertainty in the market.

CDS contracts are traded over the counter and are fairly opaque in nature and it is unclear exactly how many contracts might be triggered and who might be on the other (losing) side of the bet.

The uncertainty is naturally translating into risk-off, with equity markets declining along with the Risk-on currencies such as the euro and Sterling.

The US is once again the big winner, rising across the board over the last few days on a run that can be expected to continue until full details of the bond swap are announced.

It is fortunate given the levels of volatility in the market that both the ECB and Bank of England are unlikely to make any changes to monetary policy at their respective meetings this week.

In Europe interest rates will stay at 1%.  Mario Draghi will hopefully talk in detail about the success of the LTRO but is unlikely to be drawn to talk about Greece, much to the markets disappointment.

The Bank of England is also likely to keep monetary policy on hold; another boost to the asset purchase scheme would be seen as the Bank panicking and would probably do more harm that good at this stage.

Greece has a potentially difficult week ahead as a group of private investors consider the terms and conditions of an arrangement that’s intend to cut €107 billion from the Greek’s €340 billion debt burden.The whole deal hinges on whether the creditors are willing to take a hit of 75% on their holdings in return for a combination of long term Greek bonds and debt issued from the bailout fund.

Due to terms of the second bailout if over a third of the bond holders reject the deal the overall bailout could collapse as per terms put through Government last week.

The reaction from the rest of Europe specifically Austria is now sceptical about the overall viability of the package.

Chancellor Werner Faymann said yesterday that the second bailout is not the end of the matter.

“I would not trust anyone who says that for Greece is enough,” Faymann told Austrian media.

“For Greece it depends on whether they can stick to these measures over several elections.”

Greece will begin voting at the end of this month with a general election in the offing.

In the interim, Greek officials are required to gain the backing of a minimum of 2/3 of its private holders by Friday to employ the debt swap and comply with the requirement terms of its second bailout.

Worst case scenario Greece could run out of funds in less than a fortnight and could prompt an unruly and possibly catastrophic default.

As you would expect the news is weighing heavily on the euro right now and has seen EUR/USD slip to 1.3191 from 1.3440 at the same point last week and Sterling is approaching the key psychological figure of 1.20 at 1.1981 against the single European currency.

Money markets will keep a close eye on developments in the med and this will provide the impetus for sentiment this week.

Elsewhere the week is largely dominated by Central Bank interest rate decisions with announcements in Australia, New Zealand UK, Europe and Canada all expecting no change in the overall rate.

Any variance from these expected figures, with any turbulence from Greece and Friday afternoons US Non-farm payroll data could lead to a volatile week for the markets.

This week is likely to be a much calmer and quieter affair in comparison to last week which brought the ongoing Greek debt crisis to a close for the short term. Whether this will last remains to be seen as the struggling nation will have to renew future debt deadlines in addition to steering through an election in April.

Expect the euro to trade in limbo as traders decide on their view over how successful this latest deal will be.

Comments have been coming thick and fast from finance minsters around the world with statements ranging from ultra positive to cautious.

The G20 met in Mexico over the weekend with the topic of Euro contagion at the top of the agenda.

The eurozone countries pledged to reassess the strength of their bailout fund in March, which would clear the way for other G20 countries to contribute via the International Monetary Fund.

The G20 said “This will provide an essential input in our ongoing consideration to mobilise resources to the IMF”.

Data this week comes mainly from the States with US durable goods orders on Tuesday, GDP on Wednesday and jobless claims on Thursday.

The US government will be expecting positive figures across the board as they continue to spend their way out of recession to attract growth.

The euro currency is enjoying a healthy bounce after the completion earlier in the week of a further Greek bailout to cover March debt obligations and through positive German data. Data from Germany showed that GDP had shrunk in Q4 by 0.2%, however strength in recent ZEW and IFO surveys suggest that the economy will escape falling into recession.

The euro was also helped by good news from over the pond as weekly US jobless claims came in unchanged at 351k and this level remains the lowest since 2008. This number has helped to boost the expectation that the approaching Non Farm Payrolls on Friday 9 March will better than market expectations.

Recently US data has started to show signs of improvement as the powerhouse that is the US economy looks as though it is slowly clawing back to growth.

For the markets this improves the appetite for risk and currently this is USD negative.

We have seen EUR/USD especially push higher and test 1.34- the highest level since December, GBP/USD has also edged higher but the pound remains a little subdued.

Wednesday’s MPC minutes helped to put a dampener on the Pound as expectations rose for further QE in 2012- probably in May.

With inflation falling and economic growth struggling then QE remains very much on the table with a cocktail of low interest rates to remain.

The Pound has fallen on the back of this market feedback and is struggling to gain momentum even in a sentiment which has turned risk on.

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.

Since the beginning of the year EUR/USD has gained around 4%. The pair is trying to sustain a level above 1.3200 but struggled during Asia trading.

The euro rally is largely attributed to short positions hit an all time high for last week.

However, headline data is unlikely to provide much force to the Euro, with monthly series of PMI manufacturing confidence indices as consumer confidence readings will be under the spot light.

Realistically the figures will demonstrate some stability but investors will centre attention on the EU Summit beginning today and continuing Greek debt talks in addition to Italian debt auctions today.

Greek debt talks are likely to be confirmed this week including write downs of around 70% but nervousness over a German proposal to create a “budget commissioner” could be detrimental to the Euro.

Under the spot light in the UK this week is the January PMI  manufacturing survey however there will also be interest on housing data including mortgage approvals and house price surveys from the Nationwide and Halifax.

In general the data will do little to dismiss fears about the UK economy following the contraction in Q4 GDP announced last week.

The Pound looks to remain sturdy against a backdrop of poor economic news however, but its gains look limited especially given the disclosure in the BoE MPC minutes that some members thought that additional QE will be required.

Having strengthened against the Greenback but weakened against the Euro over recent days, GBP continues to trade in a middle of the road manner.

Cable sellers will likely emerge around the 1.5870 resistance level while EUR/GBP is set to consolidate around 0.8350.