WISE MONEY

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.

Amid wide scale protests, the Greek Parliament finally passed further austerity measures needed to secure another tranche of funding from the EU and IMF. Not surprisingly the euro rallied overnight in the Asian session and is holding onto gains in early trading this morning.

Dissenters within the pro government parties were ousted, the conservative New Democracy party expelled 21 of 83 deputies with the Socialist PASOK party throwing out another 20 of its 153.

A warning from the Prime Minster that Greece was approaching “Ground Zero” applied enough pressure to get the vote through quite comfortably in the end, but how long the Greek political system can hold up in such harsh conditions is unclear.

There is rising support within Greece, and if you believe reports from the Germans too, for a withdrawal from the euro completely.

Whether they are pushed by the Germans, leave on their own terms or by a combination of both, indefinite austerity imposed by outsiders will eventually become too much for the Greeks.

This vote may mark the half-time interval for the Greek saga, the real fireworks are yet to come.

The U.K. Economy will avoid a double dip recession according to the CBI, but only just.

John Cridland, Director General of the CBI, estimates growth to be 0.2% in the first quarter, keeping the UK economy out of technical recession.

An optimistic forecast in our opinion, but the CBI are very well respected in the market and positive news is thin on the ground at the moment.

The Bank of England inflation report is announced on Wednesday and is expected to show a sharp drop in inflation and mirroring the Bank’s forecast late last year.

Sterling is unmoved from Friday against the Euro and Dollar, the QE announcement was almost fully built into the price beforehand.

The euro enjoyed its first strong day of 2012 yesterday with signs that some confidence could be returning to the single currency. One of the main topics of discussion at the moment is the ongoing Greek debt deal.

Negotiations had taken a turn for the worse over the weekend after the authorities asked investors to accept new bonds yielding 3.5% rather than the previously agreed 4%.

The Greek government had hoped to complete talks by Monday, but as yet, no agreement has been made.

However, Greek finance minster Evangelos Venizelos said progress was being made and this was one of the main reasons for the euro strength.

He has now set a new date of 1st February to conclude talks.

Although these comments have improved the confidence level of a deal being agreed, until any deal is signed, expect the euro to remain weak as the threat of a default is still alive.

The Bank of Japan kept their interest rates fixed at 0.1% as the bank noted that the Japanese recovery is moving slower than expected.

The strong Yen remains a problem for the economy with corporate revenues likely to be down as a consequence.

The ongoing debt problems in the eurozone remain the biggest risk to the Japanese economy.

Sterling has remained in the middle against its major rivals as the euro strengthened against both the Dollar and the Pound dragging Cable higher with it.

The main news out this week for the UK is the release of 4th Quarter GDP with a -0.1% figure expected.

This significant change in momentum has been priced into the value of the Pound though it will be a massive blow to the global recovery and could be the first of many negative GDP figures from around the World as a second recession starts to bite.

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.

Yesterday’s move in the euro tells you all you need to know about the markets confidence in European leader’s current solution to the on going crisis. The fiscal problems of European governments have frozen the eurozone banking system to the point where banks are now almost exclusively only dealing with the ECB rather than other commercial banks, because the uncertainty over who and how much toxic sovereign debt everyone is holding has reached fever pitch.

The Euro-Dollar pair continues to trade towards the 1.30 level this morning which is keeping downward pressure on Sterling against the Dollar and slowly pushing the Pound higher against the Euro. The 1.30 level is key; if we manage to break through it to the downside, there is the possibility of a larger move lower but it is looking well protected at the moment.

The Federal Reserve minutes last night indicated the Central bank is continuing the wait and see strategy, indicating that it will wait for inflation to settle before another round of QE is considered.

The Fed also indicated the severity of the strain in financial markets indicating it posed significant downside risks to the economic outlook. Retail sales data yesterday was disappointing, especially given early reading from Black Friday suggested improving conditions in the American high street.

Two positive data releases in a row, well I never! UK inflation fell slightly yesterday and this morning unemployment data came in slightly better than expected.

The overall unemployment rate held steady at 8.3% but given that expectations were for a significant increase the mere fact that is unchanged feels like a huge positive swing. As with the Dollar the Pound will continue to play a back seat role as events in the Euro-Zone remain the primary driver of the markets.

The UK’s monthly inflation report brought another set of disappointing expectations for Britain’s outlook over the next 3 years. Inflation is expected to fall rapidly in 2012 before dropping below the target rate of 2% in 2013 and 2014.

The report goes on to say the Bank predicts sluggish growth of around 1% for next year with the slump lingering into 2013.

Based on these forecasts and the Monetary Policy Committee’s dovish view, the forecast is for £50 billion more of quantitative easing in early 2012 and a further £25 billion towards the middle of the year.

This is on-top of the extra £75 billion extension to the asset buying programme.

BoE government Sir Mervyn King warned “We have been going through extraordinary times and in such circumstances, there are limits to what domestic monetary policy can achieve”. All in all, a pretty dim look going forward for the UK.

We also had the UK’s Retail Sales figure for the previous month released today showing a 0.6% increase MoM.

This had very little effect on Sterling as the markets are continuing to move on the bigger issue surrounding the European debt crisis.

The euro has remained weak on the back of this while the Greenback has continued to strengthen as investors look for a safer place for their money.

Pressure was mounting on Silvio Berlusconi‘s coalition government after it failed to agree on tough new EU measures aimed at reassuring the markets that Italy’s sovereign debt is on a sustainable path. The measures include forcing the Italians to lift the pension age to 67, something that the coalition views as untouchable.

The news come on the back of rumours yesterday afternoon that today’s meeting of EU leaders has been postponed, which briefly caused a Euro sell off, before the single currency bounced back after it was confirmed that the meeting would go ahead as planned.

The markets are very quiet this morning, almost as if they are waiting for something.

The announcement will come this evening, fingers crossed we get definitive answers on all three lines of attack, the EFSF, bank recapitalisations and Greek hair cuts so the EU gets breathing space to address the more important problem of deeper fiscal integration.

UK’s David Cameron is facing a backlash from within his own party after half of his backbenchers dissented from the Government line in a vote over a referendum on Britain’s membership of the European Union.

The vote was defeated by way of support from Labour and Lib Dem MP’s, but the result was embarrassing for the Prime Minster because of the scale of the revolt from within the Conservative Party.

Unity within Government is being looked at closely by the markets and Mr Cameron cannot let any perceived cracks that are opening within the ruling party get any bigger, especially at a time of austerity in the wider economy.

Eurozone politicians already had a lot on their plate this week. Bank recapitalisations look set to happen, albeit on the lower end of the scale, but both the enlargement of the bail-out fund and the size of Greek haircuts both need to be agreed by tomorrow.

Large problems to overcome by themselves, but made even harder because the 17 Euro member countries seem to have annoyed the remaining 10 members of the European union outside the Euro, who for fear of being marginalised now want to be at the crucial meeting on Wednesday.

The 10 countries involved at such an important meeting who, although suffering economically, are not even on the same page as most of the eurozone.

This can only make the decision making process harder, especially if they are only there to look out for their own interests in terms of ceding more power to Brussels.

Naturally the Euro is shrugging off all doubts over its future and continues to trade over 1.39 against the Dollar and is steady from yesterday versus the Pound.

The US Dollar fortunes over the coming days are almost completely tied to the success or failure of the EU meeting tomorrow.

We saw risk on yesterday in the American session with equities up across the board and the corresponding weakness of the Dollar after a decent European morning for the Greenback.

Positive PMI data from China and decent earnings lifted sentiment that has carried through to early trading today.

The British economy may already be contracting according to Martin Weale of the Bank of England’s MPC, who suggests 4th quarter growth in the UK, estimated at zero anyway, may be negative and indicate the onset of a double dip recession.

No doubt also justifying the MPC decision for further QE, Mr Weale was also much bolder than usual.

MPC interviews and highlights the real concern at the Bank that as things may be set to get significantly worse for the UK over the next year.

UK inflation figures were published this morning showing that price rises are still rocketing.  The CPI for September was up +0.6% and the year on year level up to 5.2%.RPI was also up +0.8% and 5.6% for year on year.

Normally, a strong inflation number indicates that interest rate increases could follow and thus we see a gain in the value of the currency.

However, we are not in normal market conditions and the uptick in inflation will not be reflective of future rate increases as the Bank of England expects inflation to fall back towards 2% in time.

The current weak growth that is threatening the UK’s recovery continues to overshadow inflation and with the risk of a double dip recession still lurking, the BoE has no choice but to keep interest rates low.

The fact that the number was higher than forecast is actually a negative for the pound and we have seen the pound dip against the US Dollar and slightly against the Euro since the numbers were released.

Late in yesterday’s trading, the Euro lost value as pessimistic comments from Angela Merkel dampened the positive mood that was building towards the October 23 summit.

Wise Money expects the euro and the US Dollar to be volatile ahead of the summit as the Eurozone leaders hammer out further bailout measures to support the single currency and some of its ailing economies.

A QE3 could still be launched according to the Federal Reserve minutes released last night, with two on the ten strong FOMC committee suggesting the current US economic outlook could justify stronger policy action. Operation twist is aimed at keeping down long term interest rates by selling shorter term notes to buy longer dated maturities, but how successful this policy will be at keeping the economic recovery going is unclear at this stage.

Which is why the much more potent QE3 is being kept in the wings should we see another deterioration in outlook.

The news has gone some way in tempering the recent Dollar strength we have seen against Sterling and the Euro alongside investors regaining their risk appetite over the past few days.

Bank recapitalisations in Europe are fast becoming the new battle front between the banks and governments, with the head of Deutsche Bank saying the lender will do everything in its power to avoid a forced recapitalisation.

Interestingly Mr Akerman suggested that pressure from governments to hold eurozone bonds had cost the bank close to €400 million this year alone.

The Euro continues its tear higher on the back of higher than expected German CPI this morning, the ECB is heavily influenced by the German inflation hawks and so if inflation continues to climb over Europe the probability of the ECB cutting rates begins to fall.

Disappointing unemployment figures yesterday in the UK had surprisingly little impact against the Dollar and Euro.

The number is extremely worrying, given jobs are the lifeblood of the economy, and lend weight to the Bank of England’s thinking over further QE.

We can expect the jobs situation of get worse before it gets better – especially in light of the looming government cuts ramping up next year.