Articles from April 2010



Cameron wins final TV election program

Last night, the final UK leaders’ debate last focused on the economy with messers Cameron, Clegg and Brown answering questions ranging from the deficit to unemployment to benefits.

David Cameron Conservative party leader wins TV debateHowever, given that in theory at least, the subject material divided the parties much more than the previous exchanges and therefore one may expect more of a ‘debate’, the overall spectacle was extremely poor.

Mr. Cameron was judged by snap polls to be the winner, but petty squabbles and an inability to answer questions properly on important issues and dodge committing to actual figures were the main themes the leaders brought to the debating plinth.

A hung parliament is still the bookies favourite outcome, but Mr. Cameron’s relative strength last night has at least opened the door to a one party majority gaining power.

Sterling has reacted positively to the news, moving above 1.53 against the Dollar and towards 1.16 vs the Euro and given a boost this morning by the announcement of record profits by Barclays.

Over in Europe, Greece has announced further austerity measures totalling €24 bn. We have also received supposedly reassuring messages from top Portuguese and Spanish politicians on how committed they are to economic stability and that debt levels in both counties is under control.

Déjà vu anyone? With German officials leaking that they think the Greek bailout may cost €120 billion over three years, leading economists are furiously calculating just how much it might cost to do the same for the rest of the PIIGS. The first tentative answer… the massively scary number of €600bn.

Which is way beyond anything the eurozone partners can afford on their own. Step forward the IMF. Or say hello to the D Mark again?

Euro Ebola- is it terminal or can an amputation cure the spread?

The Greek debt crisis is spreading “like Ebola” and Europe must act now to protect the stability the financial markets, according to the Organisation for Economic Co-operation and Development (OECD).

Europe’s fiscal crisis worsened yesterday as news broke of Standards and Poor’s downgrade of Spain’s sovereign credit rating to AA.

This action has fuelled fears of contagion spreading through the Eurozone economies with a politician from Germany’s Green party letting slip that Greece’s revised bailout package could be worth €140bn over 3 years.

Analysts are warning of a financial crisis to the extent of the panic caused by the collapse of Lehman Brothers in 2008.

Comments from German chancellor Angela Merkel stating it was a “mistake” for Greece to be allowed into the single currency helping to fuel the discord.

Reports yesterday stated banks and pension funds sold euros at the fastest pace since the second half of 2008, when the currency plummeted 25 per cent over 3 months. With S&P taking the umbrella away as soon as it starts to rain, investors and politicians will surely be curious as to who will follow Greece, Portugal and Spain with a downgrade.

The yield on Portuguese 10-years bonds is the highest since 1997 while the spread on Spanish debt is the most in a year. The premium on Greek bonds, which were downgraded to a junk rating, fell yesterday to 9.97 per cent after talk of a more generous bailout eased pressure.

The euro has suffered an 11 percent decline in the past 6 months making it the worst performer among its 16 most-traded peers. It hit a near 12 month low against the dollar dropping below 1.32

Contagon spreads across the eurozone

Greek bonds rose yesterday to a 12 year high as Germany and the IMF demanded a clear plan to how the country will reduce its overall deficit.

This plan would involve severe public spending cuts, tax hikes and the sale of state owned assets and will do nothing to improve the industrial unrest between the Greek government and its work force with further riots and strikes expected.

The yield itself rose to an eye popping 13.7% and 9.7%, for two year and ten year bonds respectively and placed the euro near a three month low against Sterling.

The fear now is that despite the €45 billion package this will not prevent the deficit from spreading across other EU countries such as Portugal- who were themselves downgraded by credit rating agencies yesterday.

That sentiment was evident yesterday as Portuguese bonds rose to 5.3% from 4.28% a fortnight ago. The overall unrest has caused similar scenes to Greece with one in four rail workers striking during the Monday morning rush hour.

Back to the UK and with a fortnight to go before the General Election and the hung parliament issue will not go away.

The latest YouGov poll’s place the Tory’s in pole position with an increase in their share of the vote to 34% who claim that they will reduce the UK’s overall debt quicker than both of its rivals.

Euro continues slide whilst Germany delays Greek rescue

The euro fell further against the US Dollar today after Germany demanded stringent new austerity measures from Athens before committing to the rescue.

The cost of insuring Greece’s mounting government debts against default rose to a record high over fears that the ailing economy could still be denied financial aid. The loans rates demanded of Greek bonds now exceed those of Argentina.

Five year credit default swaps on Greek government debt rose to 718 basis points at the close of the New York markets.

Investors are forecast to push risky European sovereign bond yields up further after a sell off in Greek and Portuguese bonds overnight.

European stock markets slipped in early trading in response to the Greek fiscal crisis and President Obama’s failure to press ahead with reforms of the US banking sector. The euro fell by 0.2 per cent against the dollar to $1.3368.

Asian stockmarkets also fell, with Chinese stocks leading the decline to 3 per cent.

Greece could become the first eurozone country to be bailed out by its fellow members and has asked the International Monetary Fund and the European Union for £40 billion of rescue money.

The bailout package was initially greeted with optimism, but some investors now fear that it might not be enough to prevent Greece from defaulting on its debts.

Investors also fear that a Greek default could spark a domino effect among other weaker economies.

The German Chancellor was forced yesterday to issue an emergency statement promising aid to Greece — but her words failed to ease bond market speculation that Berlin might not support the eurozone’s €30 billion package.

Bond market investors pushed up the interest rate on two-year Greek debt to almost 14 per cent yesterday as rumours surfaced that Greece might seek an emergency restructuring of its short-term borrowings.

The market reaction effectively closed the door on further short term commercial borrowing. The ten-year Greek bond rose above 10 per cent yesterday as George Papaconstantinou, the Finance Minister, described the rates as prohibitive. The German Government responded with a calming statement but fell short of unequivocal support.

The German Chancellor is under pressure to take a tough line since public opinion in Germany is solidly opposed to supporting Greece. The German Government needs to pass legislation to obtain authority to issue its €8.4 billion share of the eurozone package, but it faces a potential political challenge from a regional election in North Rhine-Westphalia on May 9. Guido Westerwelle, the Foreign Minister, warned of the danger of taking pressure off Greece “by making promises of concrete aid too soon”.

Euro troubles continues

After stabilising on Friday, the Euro took another pounding this morning as details begin to emerge about the proposed €45 billion rescue package.

Greece’s request for emergency aid looked to stem the flow of selling as Finance minister Papaconstantinou warned investors they will “lose their shirts” if they bet the cash strapped nation will default. The debt saddled country has announced billions of euros in austerity measures, including tax hikes and public sector wage cuts.

The Euro has been trading back above 1.16 against Sterling while Euro/dollar has fallen below 1.33.

Friday’s UK data proved negative for the Pound as we discovered the economy grew at half the pace economists predicted in the first three months of the year. The office for National Statistics reported that GDP grew by 0.2% in Q1 2010 against the 0.4% analysts had expected.

The focus in the UK will be on the final weeks of the election campaign and the possible outcomes that may emerge as polling day draws closer. Leader of the Lib Dems, Nick Clegg, has warned current PM Gordon Brown not to expect a coalition with his party, though a tie up with the Conservatives also looks unlikely.

The Dollar advanced to a two week high against the Yen as government reports showed US new home sales rose in March by the most in almost five decades and orders for durable goods surged. Bookings for US durable goods excluding transportation items advanced 2.8 percent last month after a 1.7 percent gain in February.

Euro down to year low on Greece downgrade

The euro continued to slide towards a one year low as the downgrade in Greece’s credit rating weighed heavily on financial markets.

The single currency fell to $1.3201 in Tokyo trade, its lowest since April 30, 2009, and reached 86.26p against Sterling. It slid against 14 out its 16 major currencies.

The falls will put added pressure on the G20 meeting in Washington today to find a solution to Greece’s financial woes.

Yesterday Moody’s cut Greece’s credit rating from “A2” to “A3” and said that further downgrades would follow unless Athens could restore market confidence.

Moody’s cut its rating after it was confirmed that the Greek Government ran up a budget deficit of €32.34 billion in 2009, representing 13.6 per cent of gross domestic product — far worse than the expected 12.7%.

Finance ministers are attending the G20 summit from today to discuss the global economic recovery but investors’ caution about the summit’s outcome pushed Asian stocks down today.

Fears that the G20 may not come up with an effective plan to tackle Greece’s debt are fuelling concern that the euro could drop below $1.3000 next week.

The yield on ten-year bonds surged from 8.246 per cent on Wednesday to as much as 9.163 per cent, while that on five-year bonds, which was 8.256 per cent on Wednesday, surged to 9.818 per cent.

Economists said the moves strongly suggested that the market expected Greece to default on its debts, an outcome that Germany’s Foreign Minister has said would be critical for the euro.

Greece, which has a national debt of some £270 billion and must refinance  £7.75 billion of bonds maturing on May 19, began talks yesterday with the European Central Bank, the European Commission and the IMF about the conditions that would be attached to an aid package worth up to £40 billion.

Germany, which would be the single biggest contributor of support within the eurozone, has insisted on an interest rate of 5 per cent.

Meanwhile, public services in Greece came to a standstill for the third time in two months yesterday as government workers, actors and archaeologists took to the streets to protest deep public-sector salary cuts (John Carr writes).

There were isolated scuffles between protesters and police in two rallies in central Athens.

The demonstrations came on the second day of an inspection of the nation’s finances by a team of IMF and European Central Bank officials, who plan to announce their findings next month.

Schools and government offices were closed and hospitals accepted only emergency cases as doctors joined the strike.

Bank Of England springs no surprises on interest rates

There were no surprises yesterday as Bank of England minutes indicated the Monetary Policy Committee voted unanimously to keep interest rates at 0.50% and to maintain Quantitative Easing at GBP 200bn.

The committee however, did make reference to the pressing issue of inflationary problems evident in recent higher than expected CPI figures.

Sterling was boosted yesterday against the Euro and the US Dollar by the news that the number of people claiming jobless benefit fell by 32.9k in March, after a revised fall of 40.1k in February.

This news coupled with the heavy EUR/GBP selling this week appears to be having a positive impact on GBP/USD.

Still in the UK, Nick Clegg found himself in hot water after it was revealed that party donations were paid directly into his personal bank account. These revelations have come at a crucial time for the Lib Dem leader if he is to have any serious impression in the next political term.

The latest YouGov poll has the Tories on 33%, Lib Dems 31% and Labour 27% ahead of tonight’s second televised leaders debate. Converted into votes this would equate to Labour-Lib dem government with Labour being 68 seats short of a majority and the first hung parliament since 1974.

Back to Europe and German PMI came out at 61.3; better than expected but the market didn’t blink with the Greek issue still holding more influence at the moment. Reuters are reporting that the German/Greek 5-yr bond spread has increased by yet another 20bps highlighting the uncertainty about how Greece will resolve its debt problems.

The single currency may come under further pressures as European policy makers and the IMF will meet with the Greek government to discuss the bailout package for the debt ridden country.

Sterling gains at others expense

The Greek situation went from bad to worse yesterday with market talk of ever upwardly spiralling bail out costs leading to a rise in the country’s debt yields and CDS prices.

The 10 year bond yield broke above 8% for the first time since the Euro’s introduction yesterday and the 5 year CDS level has hit a new high of 476 this morning. With today’s belated start to the IMF/EU investigation likely to last anywhere from 10 to 14 days, there appears little likelihood of positive news over the next few days.

True, Greece managed to get away a tranche of 3 month bills into the market but this positive was tempered by the rate that they needed to pay to ensure success – approximately 2 1/2% higher than an equivalent German issue would cost.

The Euro has accordingly looked vulnerable, especially given that the US Dollar no longer appears to react negatively to positive economic/earnings data from the US. Expect more Euro downside as we approach the end of the month.

The Financial Times estimates that there is a 20% chance that Greece will default on it’s debt next year and join Argentina as a financial pariah.

Sterling has been the gainer amongst the ‘majors’, picking up against all the others. The ‘hung parliament’ issue is history for now and economic data has been buoyant.

British consumer price inflation (CPI) rose more than expected yesterday to 3.4% in March from 3% in February against a forecast of 3.2% meaning Mervyn King has yet another letter to write to the treasury. The news of higher inflation raises UK rate rise speculation with the Central Bank acting sooner rather than later although I feel that this interpretation is still tenuous.

Yesterday saw the Bank of Canada leave rates steady but come out with a bullish assessment of the economy going forward and as clear a hint as a Central Bank is able to produce, of a rate rise on the 1st June. The CAD surged back below parity to the USD and the AUD reacted in a similar way, strengthening against the US Dollar and testing record highs against the Euro. Both still feature highly in ‘best currencies to be in’ portfolios for the rest of 2010.

A dark cloud hangs over Greece- and it’s not volcanic

With Iceland’s volcanic ash cloud causing the postponement of Greek officials planned meeting with the IMF yesterday, the Hellenic Republic will be back in the spotlight with a planned 3 month Treasury bill auction today.

Spreads between German and Greek bonds reached a Euro lifetime high on Monday, pushing Greece’s borrowing costs higher and prompting comments from Financier George Soros that Greece may face falling into a “death spiral” of recession and falling government revenues unless their borrowing costs start to fall.

Sterling fell yesterday across the board as new polls suggested a surge in support for Nick Cleggs Liberal Democrats, taking them to second place behind the Tories and ahead of Labour.

If these polls turn out to be mirrored at the election, the first past the post British electoral system would mean Labour would still be the largest party in parliament but to form a Government would need the support of the Lib Dems. Reform of this system is likely to be a condition that Nick Clegg would require before forming any coalition.

In America, the Securities and Exchange Commission announced on Friday that they would charge Goldman Sachs (GS) with mis stating and omitting facts relating to the marketing of subprime collateral debt obligations. GS share price fell 13% on the news and was followed by widespread weakness in other banking stocks leading to a bout of risk aversion and the corresponding rally in the dollar as investors moved back into safer havens.

On a positive note, Citibank announced strong first quarter results yesterday sending their shares higher and sparking rumours that the US may start to sell off it’s stake of the coming months.

On a busy day for central banks, the Reserve Bank of India raised rates by 0.25%. The move was widely expected with inflation running in double digits. The Central Banks of Canada and Sweden are also meeting today although both are expected to leave rates unchanged.

Airline chaos spreads to other sectors as volcano costs mount

The financial cost to the economy of the airline chaos has intensified with Iceland’s volcanic ash cloud disruption far from over.

On top of the huge loss in revenues for airlines, other companies are suffering disruption to deliveries and supplies.

Food goods face delivery problems, with delays spreading to the drugs and hi-tech sectors if the crisis continues.

Meanwhile, more airlines have launched test flights to assess ash damage to jet engines, amid signs that some feel the threat is being overstated.

While airlines are the biggest losers, with revenues down an estimated £130m a day, other companies are starting to feel the effects of the flying ban.

They are beginning to question whether the Met Office’s computer model of the ash cloud is exaggerating its size

Although air freight represents just 0.5% of the UK’s international movement of goods, it accounts for 25% by value, and includes item like pharmaceuticals and luxury goods.

Goods air-freighted for just-in-time deliverys are especially vulnerable.

A spokesman for the British Retail Consortium said that only more exotic food produce was likely to be affected for the moment.

With the impact on businesses and travellers worsening, some people are starting to question if the air traffic authorities were too quick to shut down European air space.

The Independent newspaper’s Travel editor Simon Calder told BBC News that some airlines he has talked to are unconvinced about the extent of the safety threat.

European airlines are continuing to run test flights to assess possible damage to jet engines caused by the volcanic ash cloud. KLM, whose Saturday test went without incident, is running another eight, and Air France is also taking to the skies. Lufthansa has also run test without any problems.

British Airways ran a test flight early between Heathrow and Cardiff yesterday evening.

Meanwhile the ash cloud is spreading to the north east coast of the USA and is expected to pass over land this evening.