WISE MONEY

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.

Festive cheer in the money market seem to be running out already as we move towards the end of the first trading week of 2012. Disappointing Italian and Spanish PMI data more than offset a decent German figure and the eurozone is looking more and more likely to be heading into another recession.

The euro was under pressure for most of yesterday as risk was dumped and the US Dollar strengthened.

The theme is continuing this morning as the single currency continues to be sold; European banks continue to make headlines for the wrong reasons as they park newly created ECB cash back at the central bank rather than lending or investing it in the real economy.

Retail gloom continues to hang over the UK with many of the retailers reporting crucial Christmas figures this week.

Next shares were pummelled after they reported disappointing sales over the festive period and set a gloomy tone as we wait for results from rivals M&S.

John Lewis were a ray of light in the gloom, posting impressive sales growth compared to last year, but most if not all retailers are suggesting that economic conditions remain a real concern and are expecting a challenging year.

The Pound has opened the year in much the same way as it finished the last, namely taking a back seat to the Euro and Dollar with economic fundamentals remain less of a driver than politics.

The wise money is hoping for a clear sign of the economic picture on Friday from the Non-farm payrolls, either showing the recovery continuing or a worsening picture and the prospect of further QE this year.

More likely is that the number shows the US economy to the chugging along slowly, leaving both the Fed and the markets disappointed.

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.

Compare and contrast: the interest rate on the three month note issues by the Spanish yesterday was 5.11%, the interest rate on the US equivalent was 0.01%. Spanish borrowing costs jumped from last month’s auction partly because we are in between governments and the incoming party is still unsure if it will be able to pass the necessary austerity measures to (hopefully) reassure the markets but also because eurozone sovereign debt markets are now completely dysfunctional.

The Euro, after a bit of a rebound yesterday, has opened today on the back foot because of the Spanish problems yesterday and also due to a story overnight about the potential renegotiation of the bail-out of Dexia Bank.

Chinese PMI was also lower than consensus estimates and risk sentiment, which has been falling over the past week, will be further reduced and that means US Dollar strength, Euro and GBP weakness and stock markets continuing to fall.

The Federal Reserve minutes from last months meeting were released last night, and in light of the US GDP revision downward yesterday afternoon were surprisingly neutral in tone.

Only one member, Chicago president Charles Evans, voted in favour of QE3 with several unnamed members suggesting further action may be warranted.

The mere fact that further easing was not ruled out was enough to produce a bounce in US equity markets before normal service was resumed in the asian session.

The Bank of England will follow their Central Bank compatriots in the US by releasing their own minutes from this months meeting.

Again the market will be looking for signs of further monetary stimulus early next month.

Usually tight fiscal and loose monetary policy translates into a weak currency, but Sterling has remained fairly steady over the last year.

The size of any further QE will  be an important factor in whether Sterling stays within or breaks out of it recent range.

Spain became the third country in a month to throw out an incumbent government, with Mariano Rajoy’s conservative Peoples Party securing a landslide victory in elections last night. The win gives the new government a strong mandate to implement deep spending cuts totalling €40 billion aimed at reducing Spain’s deficit to 4.4 per cent this year.

Mr Rajoy has also pledged to liberalise the rigid Spanish labour market in an effort to cut unemployment and restore confidence in the international bond markets.

So far so good then, as the yield on the benchmark 10 year Spanish note has fallen slightly but still remains in the danger-zone of the 6-7% range.

The euro has opened the week relatively unchanged from Friday but we could be looking for it to weaken further today if stock markets remain on the back foot.

The Pound has started the week roughly unchanged against the Euro and Dollar but weaker than expected house price data overnight has seen Sterling fall slightly in early trading.

The UK government will use the data in announcing a huge new house building policy aimed at kick starting the ailing house building industry and take another step towards showing voters the coalition government does have a credible growth plan.

The scheme will also see tax payers underwriting first time buyer mortgages to secure demand for the new homes.

Data this week includes UK GDP on Thursday and the Bank of England minutes Wednesday.

Both will probably confirm the Bank plans to use more QE over the coming months to boost growth again.

In the US we also have GDP and the Fed minutes, which are more likely to show a muddling through of the US economy and that it remains in the corridor of uncertainty which further monetary action is deemed unnecessary but the recovery never really gets going.

EU data includes German GDP and a whole host of PMI inflation figures due on Wednesday.

A number of negative factors have meant risk aversion has come back with a vengeance. As usual the eurozone is under the spot light and last week’s European Union (EU) rescue agreement has failed to prevent a further widening in eurozone peripheral bond spreads.

This will be disappointing to eurozone officials as this was the main ambition of their latest deal. The deal struck by EU officials has failed to avoid a leap in Italian and Spanish bond yields.

Furthermore news that MF Global has filed for bankruptcy while the Greek PM has called for a referendum on the EU’s debt deal dealt markets a blow overnight.

As the plans announced last week didn’t really contain any concrete details over the workings of the package this has left traders questioning the ability of this latest deal.

The single European currency has lost a considerable amount of its gains from last week as various doubts about the eurozone rescue package have come to a head.

As worries had been spreading due to the lack of detail in the rescue package, including but not limited to the lack of details regarding the leveraging of the EFSF bailout fund.

The trend appears to have followed the reaction to previous EU announcements to stem the crisis, namely short lived euphoria followed by a sell off in risk assets.

The EUR is likely to struggle further over the near term, with the current pull back likely to extend and breach through 1.37.

So far today we had UK GDP which came out slightly better than expected at 0.5% q/q and y/y against a median forecast of 0.4% respectively.

Despite the positive number a weak PMI figure of 47.4 against the forecasted figure of 50 (worst since June 2009) has pushed cable lower and currently sits at 1.5931.

Short selling of financial stocks has been banned in 4 key Eurozone nations for 15 days in a bid to halt the turmoil engulfing the financial markets.France, Italy, Belgium and Spain imposed the ban from today to combat volatility hitting banks such as Societe Generale.

The ban even has a different meaning across those 4 countries with Spain including all financial instruments such as credit default swaps, whilst in France it only covers the shorting of bank equities.

The move has led to calmer markets with gains across the board.

Whether this will last once the ban is over is hard to say as there is still plenty of uncertainty surrounding the euro and its debt problems.

We have seen Eurozone data out this morning generally coming below expectations including the French GDP for the last quarter showing no difference to the previous quarter.

This will add to the pressure on French President Nicolas Sarkozy who has already had to cut short his holiday to try and calm the markets.

The UK has been relatively quiet this morning.

The riots, which spread across the country earlier in the week, have subsided and any negativity that was brought on by the unrest has been eradicated.

Chancellor George Osborne was speaking yesterday where he insisted that he had an “utterly unwavering commitment” to cutting Britain’s deficit and would not switch to a plan B in the face of the recent turmoil.

The Swiss Franc was the main mover yesterday as a Swiss Central Bank official hinted that the currency could be pegged to the Euro to prevent further appreciation.

Investors have ploughed into the Franc over the last month as the panic spread to find the safest place to put your money.

The CHF shot up from 1.16 to 1.24 against Sterling as many of the traders who have been buying the Swiss Franc now need a new place to invest.

Money markets around the world crashed yesterday on fears that the worldwide recovery is faltering and we could be heading back into another crisis. Further rumours about Italy and Spain defaulting on their debt sparked panic across the board with the Dow Jones ending down over 500 points.

The already sinking markets went into meltdown after Jean-Claude Trichet failed to reassure investors that bond buying would be implemented to prevent contagion in the troubled Eurozone.

Trichet said “you will see what we do”, yet it was revealed only Irish and Portuguese bonds would be bought.

The unconvincing tone of Trichet led to huge swings in the Eurodollar with the pair ranging 3 cents in the days trading.

Investors led another surge into the safe havens as the Swiss Franc and Japanese Yen strengthened despite the measures from their 2 central banks over the previous days.

Gold reached another record high and we look set to finish the week in fear of what will happen next.

The BoE and ECB both announced no change in their interest rates with the likelihood of any rise in the short-term of the table while the economies struggle to grow.

We end today with the hugely important non-farm payrolls numbers from the US.

This takes extra importance as not only does the US need a strong figure to boost their own problems.

The world’s traders will be watching the announcement hoping that a positive result will turn the tide and bring a bottom to the recent sell-off.