WISE MONEY

German Chancellor Angela Merkel told Davos-”We need a big rethink”.Germany’s Chancellor Angela Merkel has told the World Economic Forum that a “big rethink” is needed in the eurozone within the global economy.

“Structural reforms that lead to more jobs are essential,” she told delegates at the Swiss resort of Davos. “Do we dare to be more European?”

The eurozone is still struggling with a sovereign debt crisis and is trying to agree reform to its political system.

But many want Germany and other nations to boost the size of their rescue fund.

The International Monetary Fund (IMF) wants the eurozone to inject more cash into its rescue fund.

The IMF wants the sum available for bailouts to grow beyond 500bn euros (£416 billion) to ensure talks between private creditors and Greece do not grind to a halt.

The situation is urgent according to the IMF, which recently predicted that the economic growth rate in Europe could halve this year from an earlier estimate of 3.3% if the eurozone crisis remains unsolved.
Lessons learnt

Mrs Merkel disagrees with Ms Lagarde about what is needed.

“We have said right from the start that we want to stand up for the euro, but what we don’t want is a situation where we are forced to promise something that we will not be able to fulfil,” she said.

Mrs Merkel said that the austerity reforms being enacted – currently being felt from the Irish Republic to Italy – had to be balanced with reforms of how Europe is governed.

Mrs Merkel also acknowledged “tensions” between countries that have adopted the euro and those that have not inside the European Union (EU).

Given that the main euro paymasters Germany- and the IMF disagree on how to solve the euro credit crunch- there is only one way this story is going to go.

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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.

The volatility that ended 2011 has yet to return the markets with Sterling, Euro and the US Dollar all remaining relatively stable against each other. This may start to change with tomorrow’s central bank interest rates announcements.

Both the Bank of England and European Central Bank are expected to keep rates unchanged at 0.5% and 1% respectively, but the press conference with the newly appointed chief of the ECB, Mario Draghi will be closely monitored.

Any comments about the economic conditions and the ongoing debt crisis in the Eurozone will have a large impact on where the markets move next so no pressure Mr Draghi!

More pressure was piled on the sovereign debt predicament a number of European countries continue to be on many of the credit agencies “negative watch”.

Fitch announced that it is likely to slash Italy’s credit rating at the end of January, which will make it even harder and more costly for the struggling nation to borrow funds.

Spain, Belgium, Ireland, Slovenia and Cyprus are also on the list as the credit agencies remain eagle eyed on how conditions change.

With much of the focus on the Europe and its single currency, expect the US Dollar and commodity currencies like the Canadian, Australian and New Zealand Dollars to remain strong as investors look for safer havens to keep their money during these worrying times.

Further euro weakness could also be on the cards if negative comments are realised on Thursday.

A fresh wave of negative sentiment swept the wise money markets caused by doubts over euro banks’ capital raising plans and Hungary’s solvency.

This led to investors selling shares in the continent’s major lenders. Italy’s biggest bank, UniCredit saw its share price fall by over 17% after it announced a heavily discounted rights issue, which valued stock at less than a third of it current price.

Over in Hungary, the yield on 10 year bonds soared to over 10% after the government failed to find enough buyers for the 45bn forints (£116 million) of sovereign bonds it was trying to sell. This combination of weakness in the Eurozone led to the single currency dropping to 15 month lows against Sterling.

This weakness in Europe was countered by positive data from both the UK and US.

The UK’s biggest sector, services ended last year on a high while America’s efforts to improve their jobs market showed signs of progress.

The US private sector added 325,000 new jobs in December and the non-farm payrolls are due out today with a rise of 150,000 jobs expected.

Overall, it has been a simple week for the markets with the euro continuing to be weak while the US Dollar remains the strongest of all as investors put their money into the global reserve currency.

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.

World money markets ended off a wild and difficult year in 2011.

The UK FTSE 100 fell 5.6% in 2011, while France and Germany stocks saw falls of 18% and 15% as growing fears for the survival of the euro took their toll. But US stocks ended the year up.

The Libyan revolution saw the oil price surge in the first half of the year, while the gold price set a new record high as investors sought its safety.

Meanwhile, the euro ended 2011 close to a 15 month low against the dollar. The eurozone crisis has had a massive impact on global markets, as investors nervously await a plan to ensure Italy’s government can continue to support its enormous debts.

The US and Europe, including the UK, have also come to accept that it may be many years before their heavily-indebted economies regain their former dynamism.

Financial markets started 2011 in an optimistic mood. However, this was dramatically halted in the summer after the US lost its top AAA credit rating, following political deadlock in Congress over raising the country’s debt ceiling – the legal limit on the federal government’s total borrowing.

Much of the year has been dominated by the euro crisis, which came to the boil in August.

With fears over the future of the eurozone, many analysts say it could drop even further in 2012.

Of the heavily-indebted so-called PIIGS (Portugal, the Irish Republic, Italy, Greece and Spain) countries, Irish shares fared best.

France and Germany look likely to bear the brunt of the bailout costs for the southern European states – and this was reflected in the performance of their equity markets.

France’s Cac 40 dropped 17.5% and Germany’s Dax fell 14.7% over the year.

By contrast, the German market was the best performer in Europe in 2010, so it marks a dramatic change in fortunes for the European ‘powerhouse’.

Overall, however, the UK FTSE 100 index is 5.6% lower on the year, having fallen from 5,899.94 to close at 5,572.28 over 12 months, with worries over the impact of the eurozone crisis doing much of the damage.

This is in marked contrast to previous years – 2010 saw a 9% rise, while 2009 saw stocks rise in value by 22% during the year.

Wise Money wishes you a prosperous New Year.Wise Money wishes you a prosperous New Year in 2012.

2011 was the year of the crab- if the Chinese had one in their calendar- with many sideways darts. Some of which might have been obvious. Some of which were obvious to investores, but not it seems politicians.

Here’s hoping that those supposedly in charge of our economies get their act together. Otherwise the money armageddon suggested by this video may come true.

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.

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 euro debt crisis has taken a back seat today with no comments or figures coming from the Eurozone. Maybe it’s because the various European politicians are following the draw of their premier sporting event, the Champions League and have taken the day off. Or maybe it is down to there being no news or progress with sorting out the future of the single currency.

The relationship between Britain and France took a hit yesterday as French Central Bank chief Christian Noyer lashed out at the UK’s economy saying “Britain should be downgraded before any cut to France’s credit rating”.

Prime Minster David Cameron responded by pointing out the UK’s low bond yields and the credible plan in place to cut the mammoth annual deficit.

This aside, the markets are very calm as we finish the week. The US has some inflation figures due out in the form of CPI data as well as some FED members speaking, but these will bring little in the way of movement.

The Greenback has remained strong as invested move funds into the only currency being viewed as a “safe haven” and this will likely continue into the new year as no additional risk will be wanted over the holidays.