WISE MONEY

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.

Currency exchange money markets continue to dither between the US debt ceiling issue and eurozone peripheral debt worries.In spite of a lack of agreement to raise the debt ceiling, with House Republicans failing to back a bid by House speak Boehner, the Greenback in fact strengthened towards the end of last week as eurozone peripheral issues came back under scrutiny.

The strength of the Dollar to the lack of progress in raising the debt ceiling is remarkable and exposes the single European currency even uglier than the US Dollar, in many investors’ eyes.

The key drivers for the week ahead will depend on the scale of any boost in the debt ceiling and additional budget deficit reduction methods.

If a deal is reached ahead of the August 2 deadline it is not clear that the Dollar and risk currencies will enjoy a rally unless the debt ceiling deal is a solid and major one.

Given the limited market follow through, following the recent deal to provide Greece with a second bailout, the EUR remains wholly unable to capitalise on the USD’s woes.

A reminder that all is not well was the fact that Moody’s ratings agency placed Spain’s credit ratings on review for possible downgrade while reports that the Spanish parliament will be dissolved on September 26 for early elections on November 20 will hardly help attitude for the EUR.

Compounding the Spanish news doubts that the EFSF bailout fund will be ready to lend to Greece by the next tranche deadline in mid-September and whether Spain and Italy will participate, have grown.

The potential danger for the USD this week is not only that there is disappointing result to the debt ceiling discussions, but also that there is a weak outcome to the US July jobs report.

An increase of around 100k in payrolls, with the unemployment rate remaining at 9.2%, will fixate market attention on weak growth and if this increases expectations for a fresh round of Fed asset purchases the USD could be left rather vulnerable.

So far today we have had UK CPI manufacturing which came in at a disappointing 49.1 down from revised 51.4 in June and some way below median forecast of 51.0.

Sterling now currently sits at 1.6417 from a high of 1.6475 and 1.1390 against the Euro from a high of 1.1450….bad start to the week for the Pound.

As much as European bankers try to stop it, contagion appears to be spreading through the Eurozone with Italy’s high debt burden and lack of political will leading to more emergency meetings.  Reports that their debt stands at double Greece, Ireland and Portugal combined led to equity markets slumping and bond spreads jumping.

Europe signed a treaty to establish a permanent €700bn bailout fund, but this is only available from 2013.

In the meantime, a second bailout for Greece is still being agreed with the hope this will shield Italy.

Last night, Moody’s downgraded Ireland into the junk territory saying “it is likely that, like Greece and Portugal, Dublin will need another bailout before it can return to the markets.

Meanwhile, the UK received some unexpected news with a fall in inflation; the first negative number for June since 2003.

The figures showed CPI inflation rising by 4.2% against expectations of 4.5%.

This gave a mixed view for the UK economy as on the positive side, it shows the huge rise in inflation potentially starting to tail off and drop towards the target level.

Unfortunately, the main reason for things becoming cheaper is retailers having to slash prices to entice the public to spend what little cash they have.

Overall, Sterling was pretty steady after these figures and moves were mostly as a by product of massive swings in Eurodollar.

The volatility has continued today as the uncertainty surrounding many of the worlds markets has left traders and investors with massively diverging opinions.

It seems to be “watch this space” at the moment while we wait for more news out of Europe.

The euro vs US Dollar contest continues its rollercoaster ride this morning. After dropping two cents yesterday in quick time, sovereign debt worries in Spain and Italy along with fears over both countries banks brought the Euro down from the highs of last weeks interest rate rise by the ECB.

Fears over sovereign debt and bank solvency concerns are spreading inwards from the periphery into the ‘core’ Euro-zone economies like a swarm of locusts, once the feeding frenzy in one country subsides, the market moves on in search on the next weakest link.

The US Dollar is a good barometer for fear, and a four cent move in two days should indicate just how uncertain the Euro-zone situation remains.

That said, the size of the move is probably now overdone, so we can expect a modest retrace back over the 1.39 level as the market awaits an update on the resolution to further bail-out deals.

The net result of the volatility in the Euro-Dollar pair has been to pull Sterling in both directions.

Down against the Dollar and up against the Euro.

Both moves reflect only the large movement in the EURUSD and not anything Sterling specific.

UK CPI inflation for this month has just been released, the market had been expecting further increases and the yearly figure to push toward 5%, but the monthly figure showed a welcome decline of 0.1% and the first decline in June since 2003.

The Bank Of England are probably slightly relieved since they have persistently been calling the above target inflation temporary, but before we get excited the size of the decline is so small that it could be revised upwards, and so to positive territory very easily.