Articles from November 2010



Euro sell off continues as ecb credibility declines

There is no change to sentiment this morning as the euro remains in retreat as Eurozone bond yield spreads remain the driver for US Dollar buying. Euro sell off continues as ecb credibility declinesThis is sufficient to keep Eurodollar testing 2 – 3 month lows on a daily basis.

The sovereign spreads continued to widen yesterday despite the widely heralded financial rescue announced for Ireland and its banking sector.

The package did little to dissuade fears of contagion of the Greek/Irish problems into other peripheral nations.

Official reaction towards the future of the Euro and Eurozone has remained positive with ECB and EU spokespersons being joined by the Chinese government news agency, Xinhua in encouraging the future of both.

The Chinese stated that ‘Contrary to the widespread claim that the Eurozone is doomed to break up, the single currency will not fail’.

It did add however that the currency was facing its toughest challenge since instigation.

Other than the above interest, things in markets remain subdued with just minor de-risking taking place ahead of the year end.

Now is the time of course that analysts are penciling in their outlook for currencies for next year.

Against the current back drop and with adverse conditions in the UK, Eurozone and Japan expected to persist for a while yet, most predictions are for the Dollar to be stronger overall during 2011.

This will only strengthen traders’ resolve to test lower levers in Eurodollar and Cable and push USD/Yen higher during the remaining few trading days in 2010.

Ireland’s bail out- will it work?

So we now know the gory details. First, the main points: the Irish bailout of €85 billion will be made up of external support from the IMF and EFSF of €67.5 billion and domestic funds of €17.5 billion.Ireland's bail out- will it work and who's next?The Irish contribution comes from the now decimated National Pension Reserve Fund with the UK making a bilateral loan of €3.8 billion as well as contributing to the IMF funds (and you thought the money saved in recent round of UK spending cuts was used for paying down our own debt…).

The effective interest rate that the Irish will pay on the loan is reported at 5.8% according to the official document, but private calculations have put the figure closer to 7.25% and this will lead to an astonishing 20 per cent of Irish tax revenues servicing the debt by 2014 according to calculations.

Which Wise Money calculates will be completely unsustainable.

The main controversy is the news that senior bond holders in the Irish banks will received no haircut on their holdings – no doubt due to contagion fears as investors dump bank bonds in the event of any short back and sides – and the banks are estimated to need an extra €8bn to get core Tier One capital to at least 12 per cent.

And now come up for breath.

More than three quarters of Eurozone government debt is held by Eurozone members, mostly financial institutions so you can see why this package wants to protect senior debt holders, but politically there is huge pressure to make sure that tax payers do not shoulder the whole burden and write downs on bond holdings in the future cannot be ruled out.

Inevitably the Euro continues to fall against the US Dollar- which continues to perform well in the face of heightened uncertainty.

Sterling has also opened the week on the back foot as UK institutions are reckoned to be the most financially exposed to the Irish, particularly RBS through Ulster Bank.

UK House prices have continued to fall for the fifth month in row, but mortgage approvals came in slightly ahead of forecast.

There will need to be a much larger turn around in approvals for it to have any significant impact on house prices in a falling market. This week is a light one for Sterling data which the only figures of note UK PMI on Wednesday and further house price figures on Friday.

The Dollar trades at a two month high against the Euro and is looking at its first monthly gain versus the Yen since April.

In a week which will probably prove to be highly embarrassing for the US after 250,000 classified diplomatic cables are released by media around the world, we have ISM manufacturing, consumer confidence and non farm payrolls to look forward to.

But not as much as those cables. According to reports, the cables will reveal disparaging remarks about Gordon Brown and David Cameron, my bet is that the UK public will probably agree with whatever is said.

Euro remains cannon fodder for money markets

The euro remains the money market’s favourite target as we draw near the end of a troublesome week for the single European currency.Euro remains cannon fodder for money markets Sovereign debt concerns continuing to dominate, prompting the single currency to hit two month lows against the dollar.

The focus of attention has moved to Portugal as reports that Eurozone politicians are placing pressure on the Portuguese to obtain support from a EUR 750 billion bailout fund.

The underlying principle behind piling pressure on the Portuguese government is undoubtedly an attempt by the EU to border contagion effects and in particular to limit the likelihood of having to bail out Spain.

Even with these ongoing efforts borrowing costs for the euro region’s most indebted nations are surging.

The average yield investors demand 10-year debt from Portugal, Ireland, Italy, Greece and Spain hit over 7.50% yesterday, a record for the Eurozone.

Today the Euro/Dollar spot rate is resting at the medium strength Euro support level of 1.3265 having tested levels just below this point twice already.

Traders will not want to be long of Euro over the weekend and with 95% of all Americans supposedly off today in order to buy, buy, buy anything that moves, we could see a sharp dip in the Euro’s value sooner today rather than later.

Markets will be only too well aware that Ireland’s bail-out was agreed and announced late last weekend and that the headlines this morning concerning Portugal have a very similar ring to them…….

Ireland- not much Thanksgivings in budget plan

The Irish 4 year austerity plan was released yesterday and contained few pleasant surprises.Ireland- not much Thanksgivings in budget planPM Brian Cowen said that a bailout of €85bn has been discussed with EU and IMF officials, though not yet agreed.

While a successful conclusion of negotiations on an aid package could help stem some of the recent euro downslide, it is difficult to see a more substantial euro recovery ahead of the budget vote.

The dollar moved lower yesterday against its main rivals, after the release of a mixed string of economic figures, with employment and consumer spending giving reasons for hope while durable goods orders showed downbeat readings.

Personal Income and spending rose in October, while initial jobless claims declined.

On the other hand, US durable goods orders dropped 3.3% against market expectations for a 1.1% increase.

However, the dollar firmed during the Asian session overnight as speculation about further China tightening continued, and the recent confrontation on the Korean peninsula produced more headlines.

With US markets closed for the Thanksgiving Day holiday there is little real data though the markets in the UK will be watching closely for the Treasury Committee Hearing as Bank of England MPC members testify on the Quarterly Inflation Report.

The Bank of England’s Monetary Policy Committee Member Andrew Sentance has said he fears that monetary discipline and confidence in the inflation target risks being eroded if emergency monetary policy settings remain intact for too long and he reiterated his view that the BOE should begin to raise it’s Central Bank Rate.

Portugal and Spain targetted as bond spreads hit record

The borrowing costs for Portugal and Spain have surged to danger levels on fears that Europe’s leaders have lost political control of the Irish crisis and have yet to agree on a coherent plan to tackle the eurozone’s deeper debt woes.
Portugal and Spain targetted as bond spreads hit recordYields on 10-year Portuguese bonds jumped to 6.9pc, replicating the pattern seen in Greece and Ireland just before they capitulated and turned to the EU and the International Monetary Fund.

Spreads on 10-year Spanish bonds rose to a post-EMU record of 233 basis points over Bunds, pushing the yield to 4.87pc.

Spain’s central bank governor, Miguel Angel Fenrandez Ordonez, said the contagion had spread rapidly to the eurozone periphery and “made itself felt” in the Spanish debt markets. He called on Madrid to accelerate fiscal reforms to persuade the markets the country really means to put its house in order.

German Chancellor Angela Merkel admitted on Tuesday that the eurozone was “facing an exceptionally serious situation”.

She brushed aside criticism that German insistence on bondholder “haircuts” or debt write offs from 2013 was fuelling the crisis.

However Dutch finance minister Jan Kees de Jager sent a further chill through markets, saying “holders of subordinated bonds in Irish banks will have to bleed” under the Irish rescue.

The comment touched a raw nerve, heightening fears that investors may be treated harshly under the bail-out terms for any country needing a rescue.

Bank of Ireland shares crashed 23pc and Allied Irish Bank’s fell 19pc on fears that shareholders will be wiped out. Ominously, there was a sharp sell-off of Spain’s two top banks, with Santander down 4.7pc and BBVA down 3.9pc.

Meanwhile chief ostrich- EU president Herman Van Rompuy denied that Lisbon needs a lifeline, insisting that Portugal’s banks are well capitalised and do not face property losses. “Portugal does not need any help – it is in a very different situation to Ireland,” he said.

However, Portuguese banks have been shut out of the capital markets. The country’s total debt level is one of the world’s highest, at 325pc of GDP, and it has a current account deficit of 10pc – which requires a flow of external funding.

Flying Pigs- 2 crashed 2 to go

With the final acceptance by Ireland of euro loans- the PIGS of europe- Portugal, Ireland, Greece and Spain are now waiting for the final two to crash.Flying Pigs- 2 crashed 2 to goThe money markets now expect remaining worries over fiscal problems at other euro zone countries, such as Portugal and Spain, will keep niggling at the euro.

With their large government deficits, poor long-term growth prospects and under capitalised banks Portugal and Spain are the next potential victims of market “contagion”, where investors panic over countries’ ability to pay their debts.

Market analysts believe Portugal is the country at greatest risk of following Ireland and Greece into a bail-out, because Lisbon’s plans to cut its deficit are highly ambitious and face strong political opposition.

Portugal’s finance minister last week said the country faced a “high risk” of contagion.

The Portuguese government wants to cut its deficit from 9.3 per cent of the economy last year to 7.3 per cent this year and 4.6 per cent next year.

Its austerity programme includes 5 per cent cuts in public workers’ pay and increasing VAT to 23 per cent, the highest in Europe. Portuguese unions have called a general strike for tomorrow.

Economists say that any failure to hit government targets for cutting the deficit could cause a market panic over Portugal early next year, when the European Commission will update its figures on EU states’ economies.

Jose Socrates, the Portuguese prime minister, insisted that his country “does not need any help,” and should not be compared to Ireland.

But he conceded that the fate of his country depends on his government being able to push through its austerity programme. “The country does not have any need for aid, what it does need is to get done what needs to get done,” he said.

Portugal will need to raise more than euro 25 billion from investors to service its debts next year.

Markets are currently demanding 6.5 per cent interest on Portuguese government bonds. Some analysts believe Lisbon will ultimately decide it is cheaper to take loans from the EU and the International Monetary Fund than to borrow from the markets.

Analysts estimate that a Portuguese bail-out might require less than euro 50 billion, less than the sum lent to Greece or Ireland.

But rescuing Spain from crisis would require a much bigger sum. Much more than the “shock and awe” that the eu had promised would stabilise the markets- particularly as the coffers will then be bare after bailing out the other PIGS.

Kaiser Merkel sinks Irish independence

Ireland blamed Germany for stoking fears that holders of government bonds could be forced to suffer losses as the cost of Ireland’s borrowing hit fresh highs.
Kaiser Merkel sinks Irish independenceMarkets worry whether Ireland will be able to repay its debts, given its costly bank bail-out, weak growth and a huge budget deficit of 14.4pc of GDP, the eurozone’s highest.

Brian Lenihan, Ireland’s finance minister said the spike in borrowing costs was partly driven by “unintended” German comments proposing bondholders be forced to take losses if sovereign debt is restructured.

The market nerves pushed the spread between Irish 10-year bond yields and German yields to well over 6 percentage points, a new record. The cost of insuring Irish debt against default also hit a fresh high.

Germany has indicated the proposals would not apply to existing debt, but fears over potential losses are high after France said on Wednesday that investors must share in the cost of safeguarding debt.

German Chancellor Angela Merkel argued last week that taxpayers could not keep being told they “have to be on the hook for certain risks, rather than those who make a lot of money taking those risks.”

Although the Irish government is fully funded into the middle of next year, analysts warned politicians’ talk of losses risked creating a self-fulfilling prophecy that Ireland and other debt-laden nations will have to restructure.

Irish yields are now well above the levels Greece faced just before it saved from defaulting through a £100bn loan in the spring, according to Capital Economics.

There were warnings solvency fears were spreading as Portugal and Spain also saw the cost of insuring their debt against default soar, which kept the euro under continued pressure.

US Dollar on the back foot again over Irish woes

Earlier this week we saw a squeeze higher on the US Dollar catalysed by good US retail sales numbers  but more so through the concern over Ireland tripping into dollar strength. US Dolllar on the back foot again over Irish woesToday the market is appeased as a bailout is inevitable- ECB and IMF officials are looking into the formalities of what will be needed for the Irish economy.

The euro has pushed higher on this realisation trading back up to 1.37 against the USD supported by middle-eastern buying.

The key question is will confidence remain in the euro arena- according to Citigroup Inc and Nomura Plc the answer will be a no.

They say that relief will be short-lived as attention turns to who is next and all fingers are pointing to Portugal.

The Portuguese Finance Minister said that while “there is a risk of contagion”, that does not mean that the country will seek financial aid- so the merry go round could start again.

On top of the bailout plans Ireland will also announce a 4 year fiscal plan to help steady the ship.

Although Dublin insists that there is no threat to Ireland’s 12.5% corporation tax, the mood over the loss of economic sovereignty was summed up by Mary Lou McDonald from Sinn Fein who stated “Officials from the EU and IMF and any other vultures circling around this country should be told to get lost”.

Tough times ahead for Ireland and there is still a possibility that sovereign issues will continue to weigh on the euro for some time to come.

Focusing on the UK, retail sales rose for the first time in three months, by 0.5% providing a much needed boost as we approach the Christmas period.

The Pound has also been lifted on the news of a bailout for Ireland- the UK is exposed to Irish debt and this led to sterling weakness earlier in the week which has now been somewhat lifted.

Deutschland uber alles including Dublin

Uncertainty about Ireland’s debt crisis has helped support the dollar recently as markets remain focused on Ireland’s financial woes. Deutschland uber alles including DublinEurozone ministers have screwed the Irish into accepting a joint European-IMF mission to Ireland that could prepare the way for a bailout to prevent its debt crisis spreading to other countries.

Currencies are see-sawing as year end book closing has prompted a lot of short dollar positions built up over the past couple of months to unwind, exacerbating losses in the euro.

The Pound could come under pressure should Ireland resist assistance given UK banks’ large exposure to the country.

Sterling edged up against the dollar and euro on Wednesday after an unexpected fall in jobless benefit claims and as the Bank of England showed it had held its three-way split at its latest policy meeting.

Data showed the number of Britons claiming unemployment benefit fell by 3,700 in October, the first fall since July and confounding expectations for a rise of 5,000.

Separately, minutes from the Nov 3-4 BoE Monetary Policy Committee meeting showed one member wanting more stimulus, another voting for a rate hike and the remaining seven keeping policy on hold and ready to act in either direction.

That was likely to reinforce expectations policy would remain on hold well into next year until the outlook for the economy became clearer.

Ireland digs in and goes it alone- for now

The US Dollar staged a brief rally yesterday afternoon after the announcement that the Irish prime minister would be making an announcement at 5pm. Ireland digs in and goes it alone- for nowEveryone immediately thought that we were about to see the bail-out materialise, with risk immediately taken off the table and stocks, commodities and risk on currencies moving into the red.

The Euro came under real pressure in the Euro Dollar pair, but Mr. Cowen did not throw in the towel (although the market still thinks he will) and again said that Ireland is fully funded until July and can weather the current storm.

In a statement from the Eurogroup after the Irish P.M had finished speaking, EU officials made it clear that they welcome the Irish efforts in making the necessary fiscal adjustments but that they “confirm that we will take determined and coordinated action to safeguard the financial stability of the euro area, if needed, and that we have the means available to do so”.

Which is mildly threatening language from normally very diplomatic blokes, hence the reason why the markets believe the market based solution for Ireland is doomed.

Sterling moved higher in early trading yesterday after CPI data again showed inflation above target, triggering a letter from the Governor of the Bank of England to the Chancellor to explain the situation.

The Bank minutes from this months meeting have just been released, there was speculation of another member on the MPC voting for a rate increases which lifted Sterling again, but after the fact, the minutes showed no change in voting from last month with Sentance voting for a rise, Posen for additional stimulus and the rest for no change.

Unemployment data out at 9.30 was exactly as forecast, so the next data of note will be tomorrows UK retails sales figures.