Articles from March 2011

A Dark Day for Ireland over banking credit crunch

The Anglo Irish bank has chalked up the biggest corporate loss in Irish history and we also get to see the results of forensic stress tests on the sickest banking system in the eurozone. A Dark Day for Ireland over banking credit crunchThe tests are expected show that Anglo, Bank of Ireland and Allied Irish along with several others are in need of further capital injections to the tune of £ 25 billion to stay in business.

What the stress tests are also expected to reveal are the size and scope of current mortgage arrears, that is, how many and how far behind are a sizable portion of Irish households with their mortgage payments.

In terms of the Euro, the expectations is that recapitalisation number will be horrendous but has so far had little impact in the market as yet.

More focus has been paid to recent reports that the Portuguese do not have enough cash to meet their debt obligations and a bail-out is almost assured.

Again the news flow is very Euro negative, but the single currency seems to be able to brush off everything thrown at it.

Earlier in the day German unemployment figures continued to impress, a ray of light in a potentially dark day.

UK consumer confidence remained at depressed levels according to figures released yesterday but the Pound remains off the radar for many in the market.

Only month end flows are likely to have much of an impact today on Sterling’s fortunes with data today inline with the market expectations.

UK real disposable income falls official figures show

Household’s disposable income is officially on the slide according to figures from the Office for National Statistics yesterday. UK real disposable income falls official figures showReal income dropped by 0.8% over last year with a 0.5% in the final quarter which suggests the living standards in the UK are on the slide.

There was a slight reprieve on the GDP front as the dire 2010 last quarter results were revised up to half a percent contraction from the original 0.6% estimate.

Despite the effects of the bad weather in December the economy stood still in the last quarter of 2010 it said, a slight improvement on the previous calculation.

Poor growth is not the only headache for the Bank of England as inflation remains well above the 2% target level and there appears to be rumblings of how serious the BoE are taking this level.

Martin Weale yesterday reiterated his point for a rate rise stating “Continuing above target inflation could lead to inflationary expectations becoming entrenched”. Weale is concerned the sustained inflation pressure could be even more severe than a figure tracking below the 2% target.

Over the US and last night saw a couple of Fed members cement their hawkish tones by talking about a removal of the current QE measures.

Both Fisher and Bullard recommended that they would not vote in favour of additional QE in June while a move to begin a reversal of the current policy looks unlikely.

Employment data over the next couple of days will be crucial with the ADP survey today and the non-farm payroll numbers on Friday providing a much clearer indicator of the way things are going.

The FOMC have for a long time suggested the importance of US employment recovering before they will consider starting to normalise monetary policy.

The Dollar has had a good couple of days on the back of Yen, Swiss and, to a lesser degree, Euro softness and should pressurise better levels leading into the Friday numbers.

Higher equity prices in US and then Asian markets helped the Aussie and New Zealand Dollars to touch new highs this morning but as mentioned yesterday, an enforced slowdown in growth in China will likely reverse the currencies’ recent bull runs.

Sterling sentiment remains weak

Sterling remains under pressure this morning as we await a large UK data release including 4Q GDP (final revision), current account and mortgage approval figures. Sterling sentiment remains weakIt is difficult to tell whether it was anticipation of these figures or hawkish comments from various Federal Reserve governors at the end of last week that pushed Cable down from 12 month highs post budget, but the outlook for the UK economy has been significantly reassessed by the market and we may see the Pound test the key level of 1.5980, which has held in the pairs range trading over last few weeks, if today’s data disappoints.

Adding to the negative sentiment, business confidence fell to the lowest level in two years according to figures released yesterday and we also had comments from the Bank of England’s resident dove, Adam Posen, reiterating that he feels inflation will fall back below the 2% target as the government austerity measures and weak economy rein in what he sees as temporary inflationary pressures.

With several other members of the MPC due to speak this week and Andrew Sentance again calling for higher interest rates in an interview, the divergent views of the MPC are becoming more pronounced and a split MPC is most definitely Sterling negative.

It was another miserable day for Portuguese and Irish banks, the former being downgraded by S&P, the latter expected to need another slug of investment on top of the huge amounts already pledged to them by the Irish government.

And yet the Euro is almost unchanged against the Dollar and Pound and continues to reflect the prospect of a rate hike at next weeks ECB meeting.

The fact that Portugal will need a bail-out sooner rather than later is deemed irrelevant by the currency markets at these sorts of levels and begs the question of just what is needed to force a revaluation of the Euro. Germany running into problems would be one thing – but even a heavy defeat of Chancellor Angela Merkel in regional elections barely registered on the Euro barometer.

Sterling’s fate rests on Tuesday’s GDP figures

Today starts another action-packed week for the markets with big figures due out from all around the World. Sterling's fate rests on Tuesday's GDP figuresLast week was eventful with huge moves surrounding the Euro, US Dollar and Sterling and that is likely to continue.

US GDP for the last quarter was released on Friday afternoon and came in better than expected at 3.1%.

This led to a strong finish from the Greenback that has persisted this morning with Eurodollar dropping towards the 1.40 level.

Although today is quiet on the data front, volatility will likely carry on as investors look ahead to the rest of the week.

Out tomorrow is the UK’s GDP figure for the last quarter. Expectations are for a -0.6% reduction, which if proven correct, will show the UK economy contracting once again.

Mervyn King and his fellow committee members will be looking for an improved number as they look for strength in the UK recovery which will allow them to start hiking interest rates. Current expectations are for a rate rise no earlier than July, but with inflation expected to rise to over 5% in the short-term, the MPC will be eager to act sooner.

The ECB has maintained its stance that the question of raising interest rates is entirely separate from that of bank liquidity and sovereign debt, but this is surely untenable over time.

The Portuguese PM Jose Socrates stepped down after his budget was rejected by parliament posing fresh concerns for the European Union’s PIGS countries – Portugal, Ireland, Greece and Spain. When Portugal receives its bail-out (which it is widely expected to), attention will turn to Spain and that is when the ECB could panic. This crisis will rumble on, but in the short-term, the euro remains one of the strongest currencies on the board.

Eurozone weakness back in the money market’s attention

The euro’s resistance to bad news has been remarkable. Eurozone weakness back in the money market's attentionRecent blows include the rejection of the Portuguese government’s austerity plan, a likely hold-up in the attempt to  increase the size and scope of the EFSF EU bailout fund, a fall in Eurozone PMI this month and finally a decision last night to downgrade Portugal’ sovereign credit rating by Fitch and S&P.

In spite of all of this, and following touching a low of around EUR/USD 1.4054, EUR has bounced back close to the 1.4200 level.

Further guidance will derive from the result of the EU leaders’ summit today and the March German IFO business confidence survey.

For the former it is doubtful to be a conclusive result, with the hopefulness following the unofficial March 11 leaders’ summit likely to provide further delay due to internal strife over details.

For the latter, a minor restraint in the IFO is likely after February’s surprise high.

However, there is a bigger threat of a downside revelation following the weaker than forecast March German manufacturing PMI.

Alongside this background, EUR/USD is likely to resist to break resistance around 1.4249.

Portuguese shambles threatens euro

The resignation yesterday of the Portuguese Prime Minister has put the skids under the eurozone.Portuguese shambles threatens euro Mr Socrates stood down after Portugal’s parliament rejected the government’s austerity budget.

The yield on benchmark Portuguese bonds hit an all time high of over 8% – at those sorts of levels a bail-out becomes almost inevitable.

The Euro did weaken off against the Dollar but sits relatively unchanged against Sterling in early European trading.

We now look towards the upcoming EU leaders summit this weekend to provide a lasting solution to the debt crisis and probably announce that Portugal will at some stage need to tap the EFSF.

Though how Portugal can accept let alone implement any new financing is open to discussion when it no longer has a functioning government.

Back in Blighty the highlight of budget yesterday was Justice Secretary Ken Clarke falling asleep during the hour long speech by Chancellor George Osborne.

The market already knew what was coming and understood Mr Osborne’s hands were tied.

The general consensus is that he played his hand as well as can be expected, but the worry continues to be the downgrading of UK growth – we need GDP growth to service our debt load – and given the scale of the cuts which are about to take place the Chancellors confidence in his policy may begin to wane.

Bank of England split on interest rates 6 to 3

As with February’s Bank of England’s MPC meeting, the committee voted 6-3 in favour of keeping rates unchanged at the historic lows of 0.5%. Bank of England split on interest rates 6 to 3The 3 is made up of Dale and Weale calling for a 25bps hike while Sentence continues to argue for a 50bps rise.

They also voted 8-1 to keep the quantitative easing programme at £200bn with Posen as usual wanting an additional £50bn added.

The main comments from the extensive minutes were for inflation likely to rise further with “significant risk” it will exceed 5% in the near-term.

This comes as little surprise following yesterdays higher than expected CPI and RPI figures showing producer prices rising 4.4% over the last year.

Other comments assert that recent events have increased uncertainty about the medium term outlook for growth.

Sterling has weakened on the back of these announcements as the growing uncertainty over whether the bank can increase interest rates to curb the surging inflation remains dominant and thus, brings the end of a positive start to the week for Sterling.

The most important event for the Forex markets over the coming trading sessions will be this afternoon’s Portuguese parliamentary austerity vote.

This could not have happened at a worse time for the Eurozone, in a week jammed full on meetings and summits to all intent and purpose to sign off an agreement for stabilising the region’s funding crisis.

A negative outcome at this afternoon’s vote could very well precipitate Portugal having to seek external financial assistance, and this is certainly the thought in the credit markets with the 10-year German/Portuguese bond spread widening sharply this morning.

If the Eurozone leaders, at tomorrows summit meeting fail to ‘tie up the remaining loose ends’ of the new financial rescue mechanism, then a reversal of the Euro’s fortunes could well be on the cards.

UK inflation worse than expected

Today is all about inflation and just how much of the increasing price pressures are being absorbed by industry and retailers and how much is finding its way onto the consumer. UK inflation worse than expectedThe headline figure has come in at +0.7% m/m, +4.4% y/y, stronger than median forecasts +0.6%, +4.2% respectively which in the highest y/y rate since October 2008.

According to the Office for National Statistic the biggest upward impact on CPI came from housing, domestic heating bills and clothing.

In addition the PSNB in February at £10.280 billion, worse than median forecast of  £8.0 billion.

PSNCR came in at  £6.981 billion compared to median forecast  £4.2 billion.

Public finance data makes poor reading just ahead of the Chancellors’ Budget tomorrow.

Expect Sterling to pick up further today based on the high number but as to whether this is a correct move remains to be seen.

With growth expectations anticipated to be revised lower by the OBR, an immediate raising of rates looks likely to be counter-productive.

With Trichet again cementing the prospect of a rise in Euro rates next month, the single currency appears the likely recipient of short-term differential trades.

We are due no further relevant data today so Central Bank comment should prove to be the catalyst for additional forex volatility.

Japan’s Nikkei index opened over 2% higher after a holiday closure yesterday despite the nuclear situation remaining on high alert.

According to atomic officials, Fukushima Daiichi’s reactor 2 remains a danger as white smoke continues to drift into the sky from the plant.

The surrounding areas are now experiencing levels of higher-than-normal radiation up to 120 miles away.

Following last week’s intervention the JPY has been restored to relative normality against the USD and currently sits at 81.09.

Pound faces an interesting week

George Osborne is set to announce his first budget on Wednesday, on the same day we also see the latest Bank of England minutes and tomorrow last months CPI inflation figure is released. Pound faces an interesting weekStarting with the Budget, there are not set to be any new tax hikes or spending cuts in the announcement, with the Chancellor set to focus on trying to stimulate growth.

This should be broadly Sterling positive especially if he manages to persuade high profile businesses to move back to the UK.

The Bank of England minutes should also be very interesting, a 5-4 split should indicate an interest rate rise sooner rather than later.

Another 6-3 result would confirm the current market thinking that a rate rise before Q4 is looking increasing unlikely.

Finally, the CPI figure will closely watched but it not as important as previous month.

Wise Money expects the inflation rate to increases once more, but the credibility of the BoE will only come under further scrutiny if inflation fails to fall back towards target as the bank is currently predicting, and the current supply side shocks in oils and commodity prices turn out to be permanent rather than temporary in nature.

Last weeks combined intervention by central banks in their respective Yen pairs was broadly successful in curbing the rampant Yen strength in the aftermath of the last week’s earthquake.

More intervention is rumoured to be on the cards this week so if you are selling Yen you will need to keep a close eye on the rates.

We do have Japanese CPI figures due for release later in the week, but expect that to play a small roll in the Yens value moving forward in light of the events still evolving in Japan.

G7 supports Yen in global currency intervention

The Group of Seven agreed to jointly intervene in the foreign exchange markets for the first time in more than a decade after Japan’s currency soared, threatening its recovery from the March 11 earthquake. G7 supports Yen in global currency interventionJapan began the effort, sending the currency down the most against the dollar in more than two years.

Each of the G7 members has sold yen as their markets opened, Japan’s Finance Minister Yoshihiko Noda told reporters.

The G7 said in a joint statement after a conference call of its finance ministers and central bank chiefs that it will “provide any needed cooperation” with Japan.

Japan’s central bank repeated its pledge to pursue “powerful monetary easing” as policy makers sought to reduce the threat of the world’s third largest economy sinking into a recession.

The Nikkei 225 Stock Average gained after the announcements, paring losses to 12 percent since the quake and ensuing tsunami killed thousands and led to rolling blackouts and radiation leaks at a nuclear plant.

It is another light day on the data front- the monsters that are Greek, Chilean and Argentinian GDP figures are hardly going to move the markets.

We did have the German PPI number earlier which was announced inline with expectations at 0.7%, but still a strong number.

This has continued the euro strength trend that has dominated the markets recently and could persist if any more chat about the ECB raising their interest rates hits the wires.