Articles from February 2010



Markets slide as Greece scares investors

Stock markets fell yesterday as fear of contagion from Greece’s debt disaster combined with depressing US economic data to send share prices down.
The FTSE 100 slid 1.2 per cent to close down by 64.70 points at 5,278.22 amid fears that Greece’s problems could derail the already-fragile economic recovery. The CAC 40 in Paris fell even further, down 2 per cent, while Germany’s DAX was off more than 1.5 per cent.
Standard & Poor’s warned on Wednesday night that it may slash Greece’s credit rating to close to junk within a month, despite new austerity measures designed to cut the country’s budget deficit.
The European Commission’s decision yesterday to revise down growth forecasts for Britain alone did nothing to calm shareholders’ nerves. The commission said that UK gross domestic product (GDP) was likely to increase by 0.6 per cent this year, rather than 0.9 per cent. 
 
However, prospects for the rest of Europe were not much brighter. The forecasts showed that economic growth across the Continent would be uncertain and dwarfed by emerging Asian rivals this year.
America’s main stock markets lost well over 1 per cent in early trading, with the Dow Jones industrial average shedding almost 174 points before recovering to close down 0.51 per cent at 10,321.03.
The US Labor Department’s tally of new claims for unemployment benefits also depressed investor sentiment. It said that new dole claims rose by 22,000 to a seasonally adjusted 496,000 people in the week to February 20. Economists had expected claims to fall to 455,000.
In his second day of testimony to a congressional committee, Ben Bernanke, the chairman of the Federal Reserve, cautioned against “over-interpreting” the jobs data, which he said may have been skewed by a backlog of claims caused by recent winter storms.
Mr Bernanke also said that the Fed was investigating the role played by Goldman Sachs and other Wall Street companies in Greece’s debt dilemma. 
 
American banks entered into currency swaps with Greece almost ten years ago that allowed the country to postpone recognising its debt.
“Using these instruments in a way that potentially destabilises a company or a country is counterproductive,” the Fed chairman said. “We’ll certainly be evaluating what we learn from the activities of the holding companies that we supervise here.”

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US to maintain low loans interest rates

Not a surprise but the markets appreciated the confirmation from the FED which removes any potential near term surprises from the Fed. 
Equities picked up on the news but risk appetitie is far from returning. Europe came back to the fore and this morning the markets are in a tailspin of fear again as the threat of a sovereign downgrade looms over Greece. 
This opens up the possibilty of Grrek bonds being illegible with the ECB, making it more difficult to borrow.
The Yen is flying in the markets today and has pushed below 89.50 against the USD and pushed GBP down to 136.82 as we stand. The Yen is being favoured as a safe haven after recent strong economic data; the USD has also experienced gains again today with EUR/USD dropping as low as 1.3449 and GBP/USD to 1.5270 a new 9 month. 
Big day tomorrow for sterling in the revision of the Q4 2009 GDP- it is expected that it will be revised up to 0.2% from 0.1%- we need as expected or better to stave off further sterling selling. 

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US consumer confidence remains fragile

Yesterdays US consumer confidence data came in weaker than expected and highlights the delicate recovery phase for the US economy. 
This also backs up recent dovish comments from the Fed asserting that interest rates will need to remain low for a prolonged period and that liquidity withdrawal may not be a foregone conclusion. The data helped to spook the markets and strengthened the natural safe havens of the JPY and USD. 
The Yen was also lifted on good export data pushing GBP/JPY back below 140.00 and USD/JPY down to 90.00. 
At the moment for recovery we have an east and west divide with robust recovery coming from China, Malaysia, Honk Kong contrasting the jitters in Europe, the UK and the US. The tide has shifted.

The Greece debacle is still ongoing and Fitch downgraded the 4 largest banks to BBB with a negative outlook to boot. The situation was not helped by a German lawmaker of the ruling conservative party commenting that Germany must ensure that it does not pay for Greece as it could trigger the demand for more aid. 

In addition the Czech finance minister said that the Greek pledge to cut the deficit to 3% in 3 years is “nonsense” in his view. 

So some lively times ahead.

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Sterling exchange rate lowers against the US Dollar

Fiscal concerns and the contining dovish stance from the MPC continue to weigh on the Pound. 
Throw into the mix increased political uncertainty with the narrowing of the polls and the future does not look bright for the Pound. 
Today we had members of the MPC commenting on the quarterly inflation report where the bank lowered its growth and inflation forecasts underlining a dovish stance on monetary policy. 
King was his usual cautious self and highlighted the fragility in the UK economy and reaffirmed that inflation is likely to come down later in 2010. On the deficit he did note that we have a very large fiscal deficit and that rating agencies are to remain “somewhat uncertain” until the deficit is tackled. 
King affirmed that he would be immensely surprised if rating agencies downgraded the UK.

Another MPC member David Miles noted that the decision not to raise QE was very finely balanced and this has contributed along with the dovish tone overall to sterling slipping 1% against the USD and over 0.5% against the euro.
Later this week we have important feedback in the form of the second revision of UK GDP and also important numbers from RBS and Lloyds- especially critical due to the government involvement. 

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling softens as UK debt is in the spotlight

Sterling has lost over 1% against the euro and just under 4% against the US Dollar in the last month
The surprising move is the fall against the euro as the Greek fallout has held court in the media for sometime now and yet sterling falls against the euro. 
Weaker retail sales and weak business and mortgage lending have compounded the weak sentiment, however the real danger for sterling is the UK deficit. 
The economists are arguing with each other on whether to cut now or later- the common agreement is that cuts are inevitable but when? Economists should focus more on the how and what to cut and the politicians should lay their cards on the table with their full deficit reducing plans outlined now to avoid further uncertainty. 
The credit agencies want credible plans and not political or economic disagreement.

Lots of politics thrown into the mix over the weekend with news of a narrowing in the polls and Heseltine touting a hung parliament did not dent sterling further. However we can expect the election run up and the focus on the deficit to continue to affect the pound.

Sterling also lost further ground against the USD following the Feds decision to increase its discount interest rate by 0.25% on Thursday evening. 

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US Dollar shines after positive minutes

Yesterday the markets digested the minutes of the February interest rate meetings for both the UK and the US. 
Firstly looking at the UK the vote was a unanimous 9-0 to keep interest rates on hold and also to hold QE at £200 billion. The feedback from the MPC was ambiguous in the sense that the decision was unanimous and yet the comments were that it was a “finely balanced” decision to keep QE on hold. 
The unanimous decision gave Sterling a boost which was then tempered by weaker than expected employment numbers. Going forward this does not change the sentiment for sterling which will struggle to appreciate until the outlook for the UK warrants a more hawkish approach from the MPC.

Over to the US and the FOMC upgraded their forecasts for the US economy reflecting a more bullish tone from the Fed. 
They also discussed trying to shrink their reserves over time although no time frame was announced to do this. The positive tone from the Fed with improved economic sentiment in the US coupled with loitering fear in the markets helped to push the USD higher.

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UK jobless data worse than expected

UK jobless claims were up 23,500 against the expectation of a fall of 10,000 for the employment sector. 
This data for January was disappointing but not wholly unexpected and simply reinforces the fact that the employment sector remains very sluggish. Although we may have officially exited the recession on paper the reality is that we still have a long a painful road ahead.

The official unemployment rate remains at 7.8%. In addition to the employment data we also had the minutes from the February interest rate meeting for the UK. 

The BoE minutes came in 9-0 as expected to keep interest rates and QE on hold. Although all members voted to leave the size of the asset purchase programme unchanged- it was noted that some members felt the arguments for a further increase were “finely balanced”. 
This underlies the uncertainty within the MPC on the future impact of the £200 billion already introduced and therefore the MPC will not close the door on further QE if required.

Sterling is likely to remain subdued as the BoE feel that inflation will fall further in 2010 and further expansion of QE is a weapon that they will use again if necessary. 

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Eu bullies Greece over finances and raises sovereignty question

The European Union has bullied Greece by stripping it’s vote at a crucial meeting next month, the worst punishment ever suffered by an EU member state.

The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. 

It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty which would amount to economic sovereignty.

While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.

Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from “receivership”.

The EU has still refused to reveal details of how it might help Greece raise €30bn (£26bn) from global debt markets by the end of June. Investors are unsure whether this is part of Kabuki play of “constructive ambiguity” to pressure Greece and keep markets guessing, or reflects the deep reluctance by Germany to be drawn deeper in an EU fiscal union. 

Greek bonds sold off as ten-year yields jumped to 6.42pc, but the euro rallied to $1.3765 against the dollar as broader issues resurfaced in currency markets.

Jean-Claude Juncker, head of the Eurogroup, hinted that ministers have already agreed on a support mechanism, should it be necessary. It will most likely involve by bilateral aid by eurozone states. He said proposals for an IMF bailout – backed by Britain – were “absurd” and would shatter the credibility of monetary union.

Many Germans disagree, including Otmar Issing, once the backbone of the European Central Bank. He said an EU rescue for Greece would be fatal, arguing that unflinching rigour is the only way to hold monetary union together without political union.

Tuesday’s EU verdict amounted to a thumbs down on Greece’s earlier austerity efforts, viewed as too reliant on one-off measures and too light on spending cuts. 

Greece must reduce its deficit from 12.7pc of GDP to 3pc in three years. Greek customs officials expressed their anger by kicking off a three-day strike, the first of many stoppages set to culminate in a general strike next week.

However, premier George Papandreou has won support from key political parties and a majority of the people.

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Inflation figures create another letter from Mervyn King

UK CPI inflation rate came in at 3.1% against the expectation of 3.2% so slightly lower than expected. 
However the year on year rate is +3.5% and will require a letter of explanation from Mervyn King to Alistair Darling to explain why. King has regularly banged the drum that inflation will come down as we move through 2010 and today’s data to a small extent justifies his forecasts. 
However the data did not move the FX markets which have been quiet today considering the amount of market feedback. What the data does assist with is the BoE continuing with their policy of low interest rates and leaving the door open for further QE if deemed necessary.

Today European finance ministers are meeting again concerning Greece- feedback so far again is largely talk with no real details of the fundamentals of how assistance will be delivered. 

The ongoing situation is leaving the markets flat as risk is held off the table until further clarity is divulged. We have seen a further expansion in the credit default rates today for Greece reflecting the lack of clarity.

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UK jobs market is still on the ropes- CIPD

The UK economy is facing more redundancies, with substantial cuts expected in the public sector, a report has said.
Almost one in three public sector employers plan to shed jobs this quarter, the Chartered Institute of Personnel and Development (CIPD) said.
Its latest quarterly survey found that the jobs outlook had worsened despite the UK emerging from recession.
“The UK jobs market is still on the ropes,” the CIPD said as unemployment currently stands at 2.46 million.
The number of people out of work had been steadily rising since the summer of 2008, but saw a surprise fall in the three months to November.
The latest unemployment figures will be announced on Wednesday.

In the public sector, defence and public administration look set to be hit particularly hard.
However, there was better news from the private sector, which expects to see staff numbers grow for the first time since the start of the recession.
The CIPD’s survey also reveals that the outsourcing of jobs abroad is a concern for the employment market again.
One in 10 companies is looking to outsource jobs in 2010, with almost half of IT companies saying they would be moving jobs abroad.
India remains the most popular outsourcing destination, followed by countries in Eastern Europe.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.