Articles from May 2010

PIGS realise the way to escape is to chop

With Italy following Spain, Portugal and Greece with a statement on its austerity measures, the Eurozone PIGS finally understand the severity of their problem.PIGS realise the way to escape is to chopUnfortunately, it could be too late for Greece with reports in the FT claiming that “public debt to gross domestic product forecast to hit 150%”, which makes it hard to believe the country will correct its problems before the aid runs out.

Sterling continues to trade above 1.17 versus the Euro, after hitting an eleven month high yesterday. The UK currency was buoyed by talk of a failing take-over bid by Prudential for AIG’s Asian business, with the speculation also lifting sterling versus the dollar.

However, further momentum for sterling is limited after news that UK consumer confidence fell for the third consecutive month in May, reflecting uncertainty ahead of the election result and the prospect of fiscal tightening once a new government was in power.

According to figures released yesterday afternoon, the US economy grew in the first quarter at a slower pace than previously calculated, reflecting smaller gains in consumer and business spending and highlighting the risks to the recovery posed by the European debt crisis.

The 3 percent increase in the annual rate of GDP was less than forecast and compares with the advanced estimate of 3.2 percent issued last month.

The Australian dollar headed for its first five day advance in more than a month as Asian equities extended a global rally, boosting demand for higher yielding assets.

After previously dropping 7.4 percent so far in May, the Australian Dollar surged this week after China’s foreign exchange regulator affirmed its commitment to investing in Europe, triggering rallies in stocks and commodities.

Europe realises it can’t afford nanny state any more

Spain’s parliament is to vote on government’s plans to cut  €15 billion off it’s budget deficit today. Europe realises it can't afford nanny state any moreExpectations are that the government will see it’s proposals approved, but voting is expected to be tight.  Basque Nationalists said yesterday they will side with main opposition in opposing the cuts.

Further along the med and Italy have planned to make €24.9 of budget cuts over the next two years are viewed by the Italian PM Berlusconi as “absolutely necessary” in order to support the Euro and protect Italy.

These attempts from Europe are efforts to convince investors that the region can handle budget deficits and strengthen the Euro.

The news has pushed the euro/ US Dollar rate higher from 1.2190 over night to 1.2287 at the time of posting.

It has been a different story against the Pound which has strengthened against the euro from 1.1748 over night to 1.1858 at present.

In the UK this morning news that the controversial Prudential takeover of AIA deal may be off has pushed Sterling firmer from 1.4376 over night to currently 1.4575.

The Pound/ US Dollar rate is gaining decent support from this development and the rumour that the deal might not go through has led to speculation that cable hedges (thought to be of significant size) might have to be taken off, which has lead to sizeable buying on the pair.

More pain in Spain with banking shotgun weddings

Yesterday was packed full of announcements from the eurozone, some welcome some less so.

First, Italy followed Greece, Spain and Portugal in outlining €20 billion of government savings aimed at bringing their deficit below the EU threshold by 2012.

Second, Spain announced the merger of four regional savings banks to one, in the process creating its fifth largest financial institution and, it is hoped, bringing much needed stability to the beleaguered Spanish banking system.More pain in Spain with banking shotgun weddingsThe shotgun marriage comes hot on the heels of the Spanish Governments rescue of Caja Sur, another regional lender, after its own merger fell through at the final hurdle.

The not so welcome news is that Germany is now looking to extend the ban on short selling to all shares (this is extended from government bonds, credit default swaps and the top 10 German financial institutions).

Quite how this unilateral ban will work when it looks as though we are entering a fully blown bear market in not clear, but we do expect continued volatility in the EUR/USD and GBP/EUR pair as investors try to gain from falling markets.

More euro worries deter money investment risks

The euro weakened for a second day against the US Dollar, the Japanese Yen and the British Pound as signs the European debt crisis is spreading revived concern the region’s recovery will slow.More euro worries deter money investment risksIn particular, the 16 nation currency fell to within one yen of its weakest point in more than eight years after the IMF urged Spain to do more to overhaul its ailing banks.

Markets are concerned about what policy makers can do to contain the debt crisis should it spread from Greece to bigger nations like Spain and Italy. The IMF welcomed the new Spanish austerity measures, referring to plans to rein in its budget deficit with the deepest cuts in three decades but expressed concern over its banking industry and the slow reaction in consolidating ailing lenders with stronger partners.

The EUR/USD is now back trading close to the May 19th four year low.

Despite recent acceptable data from the Eurozone countries themselves, there is a real fear that the recovery will sputter to a halt amidst the internal wrangling of how to deal with the spiraling funding crisis.

This will obviously have a knock on effect towards the global recovery, with the UK especially exposed to a weaker European market.

Sterling has accordingly been shorted aggressively, but largely against just the Dollar and the Yen. It has managed to gain slightly against the Euro on the back of QoQ GDP coming in as expected at 0.3%.

The US was decidedly quiet yesterday although we are still experiencing US$ LIBOR ticking higher on a daily basis adding further fuel to the Dollar strength argument.

The market appears to be waiting for anything tangible on exchange rates emerging from Geithner’s meeting with Chinese officials.

Yesterday they appeared to skirt the issue and spent most of their session together discussing Europe and the implications to both countries of the current situation. Today’s final session could be more interesting.

Sack cloth and ashes from new austerity regime

Today sees the start of a new age of austerity as the Government announces £6.2 billion of immediate spending reductions, paving the way for much deeper cuts in the future.

The Liberal-Conservative coalition is hoping that these initial cuts will prepare the population for severe fiscal measures next year with reports of up to 300,000 public sector redundancies.

Despite these unpopular decisions, markets have been indicating that they want these measures in place if Sterling is to recover against the majors in the long term.

Over to the European mainland and the Euro recovered somewhat on Friday, reaching a one week high against the Greenback as buyers returned to the Euro and halted the currency’s decline. This welcome support came on the news that EU officials pledged to tighten sanctions on high-deficit member countries and said that no European country will be allowed to renege on its debts.

In the early session this morning, the Euro has given back some of these gains with traders reported to be selling into the bounce on ongoing concerns about the outlook for the Eurozone.

To add the Euro’s problems, concerns that the EU credit crisis is spreading with the announcement that the Bank of Spain is to take over the running of one of the country’s saving’s banks.

This pushed the Euro lower against the Dollar and Sterling from highs of $1.2510 and $0.8635 respectively. However the Euro remains well off last week’s four year low of $1.2146, as markets awaits further developments in terms of the sovereign risk issue.

Fear of risk sails around the world

Stock markets around the world suffered further falls yesterday as investors continued to unwind risky positions and move into calmer waters.

The problems in the Eurozone have been the driving force behind the huge market movements we have seen across the currencies over the past few days.

China has been powering the world’s economy over many years, but with Europe its largest customer, investors fear a European induced Chinese slowdown would derail any economic recovery.

Hedge funds are reported to be reversing positions to preserve capital, most notably in the Aussie dollar pairs, which have seen large swings in value over the past few days.

Disappointing economic data yesterday from the USA showing a surprise increase of 25,000 in jobless claims and poor Eurozone consumer confidence figures exacerbated the negative sentiment in the market yesterday.

Sterling fell to its lowest level in 13 months against the Dollar driven by the rush into the safe haven rather than anything Sterling based.

Retails sales showed a third straight month of increases, a positive bit of data for the UK that was shrugged off very quickly by the market. Sterling sentiment remains weak, so expect the Pound to come under further pressure as risk is taken further off the table.

Last night, the US Senate approved the financial reform bill after lengthy negotiations. The legislation, penned as a response to the Credit Crunch will, amongst other things, stop deposit taking banks from trading on their own accounts (proprietary trading) and allow the government to seize control of a failing firm that is judged to be systematically important.

We will have to wait on the fine print, but this will almost certainly have large implications for the markets because the biggest players (the banks) will be forced into restructuring. The added uncertainty of how this will work is adding to fears over the Eurozone.

Naked germans short selling own goal

Angela Merkel’s announcement of a ban on short selling any sovereign bonds, credit default swaps and shares in Germany’s top ten financial institution was supposed to bring calm to the markets – instead it’s turned into a spectacular own goal.

Naked germans short selling own goal The euro US Dollar foreign exchange rates has since hit a fresh low, sliding to 1.2140 before recovering significantly after rumours of the Fed and ECB checking prices at major banks (which is tantamount to direct involvement) and stock markets around the world suffered further falls.

There was widespread condemnation of the move, the main fear being that the regulations would scare investors away from the Eurozone just at the point when it needs them the most (BNP Paribas reported major capital flight to Switzerland yesterday).

It is also a blatantly political move masked in economics, designed to garner support from the left and shore up Merkel’s government.

The effectiveness of a one country ban on short selling was Deutsche Bank, Germany’s largest financial institution, who after the ban was introduced ceased trading in CDS’s between 7am and 9am until they realised the ban only applied in Germany and promptly resumed normal business through their London office.

The release of the Bank of England minutes yesterday shows a continuation of the dovish stance of the MPC. They again voted unanimously in favour of keeping interest rates on hold and remained cautiously optimistic that the economic recovery would pick up pace the latter part of this year and into next.

However, with inflation still above the target level of 2%, a rise in interest rates later this year cannot be ruled out. Sterling posted gains yesterday against the Euro, moving once again above the 1.17 level and also gained 5 cents against the Aussie Dollar as a short squeeze on the carry trade caused investors to cover their positions and push the Pound higher.

Naked Germans- beach yes short selling no.

Germany has banned naked short selling Germany has banned naked short sellingThe euro came under pressure last night after Germany announced a ban on naked short selling of some securities effective immediately. Included in this bracket are the Eurozone Sovereign bonds as well as 10 of the biggest financial institutions.

The proposal was meant to calm the markets, but the Euro promptly dived below 1.22 against the greenback.

Naked short selling is when a trader sells a financial instrument, such as shares or bonds that they have not yet borrowed.

The Dow collapsed 114 points on the news as fears of a drop in funds for banks which could result in a scramble for cash as seen in the depths of the credit crunch 2 years ago.

Risk took a pounding with equities dropping, commodity prices falling and a rush to get hold of the “safe haven” Dollar.

Sterling slipped back on Tuesday as UK inflation data exceeded the central bank’s upper limit for the third time this year.

The Office of National Statistics said consumer prices rose by 3.7% in April compared to 3.4% in March, above forecasts for an increase of 3.5%. Of course, these figures require BoE Governor Mervyn King to write a letter to the new Chancellor explaining why this has arisen and what the Central Bank intends to do about it.

They are also fuelling concerns that potential monetary tightening as well as fiscal tightening may scupper the economy’s recovery following George Osborne’s comments that most of the 2010 spending cuts would be used to reduce borrowing.

King maintains his cautious tone as he continues to see “substantial” slack in the real economy.

New UK treasury statistics to be more trustworthy

George Osborne the new UK Chancellor of the Exchequer announced yesterday that he was “changing the way Budgets are made forever”.

He claims that unlike his predecessors he will “fix the budget to fit the figures” and provide tax payers with a greater clarity over the UK finances.

This is ahead of his emergency budget next month when he plans to outline £ 6 billion in spending cuts this year ahead of an emergency budget on June 22.

Sterling hit a 13-month low against the dollar yesterday and continued to weaken versus the euro as data showing a slowdown in UK house price growth raised concerns about the health of the economy.

Property web site ‘Rightmove’ said that asking prices for British residential properties increased at a slower pace for the month of May compared to April suggesting a slow down could be around the corner.

Is the euro heading to Dollar parity?

The euro has continued sliding against the US Dollar, reaching it’s lowest level in four years.

Concerns remain about the massive bailout package announced by the EU and IMF last week and how effective (or not) it might be in addressing the core issue affecting troubled EU member states, namely huge fiscal deficits.

The ECB have been intervening directly in secondary bond markets, bringing some well needed stability and halting the huge volatility in yields over past couple of months.

The side effect of the ECBs intervention has been to move all traders with negative view of the Eurozone from the bond market to currencies, and with EU officials publicly announcing the need for a weaker currency, it looks like a one way bet at the moment.

Most of the financial press over the weekend were calling for parity in EuroDollar, but if the market is oversold we may see a short squeeze over the next few days before the Euro moves lower again.

The new UK Government is indicating that is making deficit reduction a priority, Chancellor George Osborne has just announced £6bln of savings the details of which will be announced next Monday.

The emergency budget promised by the Tories in their manifesto will be on the 22nd of June and the Office of Budget Responsibility (newly created by the Conservatives) will publish economic forecasts before the EM because Osborne think the market has completely lost confidence in the current Treasury forecasts (3.5% growth next year does seems on the high side).

Sterling has rallied on the back of this but market sentiment seems still to be for further falls in Sterling against the Dollar- which has reached 1.45- from 1.50 only a week ago.