Articles from April 2011



Greek finances worse than feared

Fears that struggling eurozone nations will not be able to pay their debts grew as official data showed the hole in Greece’s finances was bigger than thought.Greek finances worse than fearedA restructure of Greek debt, cutting the interest rates and lengthening the terms of the loans, would represent an effective default as the debt would be worth much less.

The deficit in the Greek government’s budget amounted to 10.5pc of GDP in 2010, EU statistics agency Eurostat reported on Tuesday, putting it significantly above February’s 9.6pc estimate from Brussels.

The continued flight from Greek sovereign debt pushed the yield, or return, on the 10 year government bonds to new highs of 15.5pc.

In late 2009 a more dramatic revision of Greece’s deficit sparked Europe’s debt crisis as it ignited fears about the state of weaker eurozone nations’ finances, eventually leading to Athens last year receiving a £98 billion bail-out. Ireland and Portugal have since followed in requesting international aid.

The Greek finance ministry said the latest “deviation” was “mainly the result of the deeper than anticipated recession of the Greek economy that affected tax revenues and social security contributions”.

Athens had planned to cut the deficit from 15.4pc of GDP in 2009 to 8.1pc for 2010.

Despite denials from Greek and EU officials, the pricing of credit default swaps – instruments that insure the debt – signalled a 66pc chance of Greece defaulting within five years, according to data tracker CMA.

Jose Manuel Gonzalez-Paramo, a member of the European Central Bank’s executive board, warned on Tuesday a restructure would be “quite likely more devastating” than the fall of investment bank Lehman Brothers, which precipitated the financial crisis.

Portugal also disappointed as Eurostat confirmed the figure out from Lisbon at the weekend that upped its 2010 deficit to 9.1pc of GDP, compared with earlier estimates of 7.3pc.

Separately, an auction of Spanish debt caused more worries as six month bonds were sold with an average yield above 1.8pc, half a percentage point higher than at a sale last month.

Euro focus of thin wise money markets trading

Risk appetite took a step backwards and the euro dipped in thin trading and with Europe re-joining the fray (although not with any real commitment as yet) it doesn’t appear that sentiment regarding money markets like currencies, interest rates or sovereign debt issues has changed one iota.
Euro focus of thin wise money markets tradingTrading sessions in the days around the weekend were light in volume and low in movement with thin US markets almost totally on their own for long periods.

We did see commodities and equities ease as a result of a decision from a major futures exchange to increase the margin for trading silver prompting a wave of profit taking in both silver and gold.

This then filter through to forex trading and, coupled with a comment from ECB President Trichet who said that maintaining a strong Dollar was in the US interest, caused the Greenback to make a bit of a recovery.

Last Friday’s data from the US was on the slightly weaker side of ‘as expected’ with new home sales roughly in line but the Dallas Fed manufacturing index marginally softer.

With the escalation of tensions in the Middle East / North Africa region now encompassing Syria, the Euro has headed back to its last week’s highs, with the Dollar again recording fresh lows against the Swiss Franc as oil once again turns higher.

We are scheduled to get several risk events this week that will test the market’s resolve on its bearish stance for the Dollar.

The first of these is the FOMC rate announcement tomorrow afternoon but more important will be the press conference that follows.

Despite growing concern that 1st Qtr GDP in the US will emerge as softer than originally hoped, expectation is that Ben Bernanke will send a clear signal to the market that the current tranche of QE, scheduled to end in June, will finish as planned.

There is currently no reflection of tightening monetary conditions in the forex market so, dependent upon the tone of the Chairman’s comments tomorrow, there appears good potential for a stronger Dollar going forward.

US Dollar falls as wise money investors focus on the positive

As US corporate results continuing to surprise on the positive side the wise money is increasing their investment risk profiles. US Dollar falls as wise money investors focus on the positiveThe Dollar accordingly came under renewed pressure with investors again off-loading the Greenback to invest in equities and commodities as well as in the commodity based currencies.

This latter strategy is especially attractive at present with these currencies currently offering a big pick up in yield when compared to that of the US currency.

So, the Aussie reached a post-floatation high at 1.0775 and with the Dollar index hitting a 3-year low, both the Euro and Sterling touched 16-month highs at 1.4640 and 1.6517 respectively.

Gold was up again and USD/CHF hit an all time low.

One can argue that with ongoing developments in the Eurozone debt market and continued evidence of economic recovery in the US that the spot market has got it wrong but that would be a bit like King Canute trying to turn back the tide.

Go with the flow but watch carefully for the turn in sentiment.

Back to Europe. The 2 debt offerings, from Spain and Portugal were better received than had been feared with the former successfully auctioning 10 and 13-year bonds, admittedly needing to pay a higher yield but on the positive side, garnering better coverage than at the last similar offering.

Portugal also achieved its desired cash raising, via a 3 and 6-month bill sale, but in this case, not only was demand down but the yield demanded was higher than the last, pre-bail-out, rate.

This doesn’t make any real sense and obviously indicates the market’s trepidation over the future path of the country’s financial well-being.

With a further escalation of fears of a Greek debt restructuring as well as concern over the Irish demands for a renegotiation of the terms of its own bail out, the correlation between bond yields of the Eurozone constituent states was become fractured.

Yields on 10-year bonds issued by Greece, Ireland and Portugal are respectively 15%, 10.5% and 9.3% compared to the yield on 10-year German bunds of 3.3%.

If the market’s perception was that the current problems were containable then spreads of this magnitude would not exist. Numbers say more than words ever can…..

Bank of England minutes damp expectations of interest rates rise

The Bank of England minutes, released today showed that the MPC has not come any closer to raising rates. Bank of England minutes damp expectations of interest rates riseThe vote as expected showed the split remaining at 6-3, with Spencer Dale & Martin Weale voting for a 25 basis point rise and Andrew Sentance for a 50 point rise.

Data this month has shown the economic recovery stalling somewhat, and the surprise drop inflation (although probably temporary) should be enough to postpone any rise in interest rates.

The Pound is being pushed around by the Euro-Dollar pair, which has rebounded from the lows yesterday after strong earnings from IBM, Intel and Yahoo boosted risk appetite in the Asian session.

One would have expected the S&P downgrading of the US outlook to negative from stable to push up US rates.

But there was almost no reaction.

Whether this reflects S&P’s standing in the market post crisis, or the fact that the Fed is the only buyer of Treasuries currently is difficult to assess.

But the Dollar has reacted negatively, and may come under further pressure this afternoon if existing home sales data fails to impress.

USA debt rating downgraded by Standard & Poors hits global markets

Standard & Poor’s cut the outlook on US sovereign debt for the first time ever from stable to negative although retaining the current ratings at their highest possible levels of AAA and A-1+. USA debt rating downgraded by Standard & Poors hits global marketsThe adjustment was explained as being a warning to the US that its constantly swelling debt pile was unsustainable and that corrective measures would need to be introduced immediately.

The negative outlook implies that if nothing changes in the next 2 – 2 1/2 years, then an actual downgrade has a 1 in 3 chance of being triggered.

It is by no means certain that this will occur, but should shake up opposing US politicians enough to start the remedial action moving forward.

Suffice to say, the announcement provoked a flight from risk.

Equities fell, bond yields rose, commodities came off and with them, the commodity based currencies such as the AUD and CAD.

Gold and silver both rose, as did the Swiss Franc and oddly, the US Dollar.

The news is now old and largely irrelevant to today’s trading so we are back to the factors that were affecting the market yesterday morning – Eurozone debt issues, the Libyan situation and Chinese economic policy.

We are still getting mixed messages concerning a possible Greek debt restructuring with Jurgen Stark, an ECB Executive Board member commenting that debt restructuring is a very costly process and that it creates more problems than it solves.

An EU source stated that Greece had accepted that a ‘mild’ restructuring of its debt was unavoidable.

ECB President, Trichet, when asked about the subject this morning, fended off the questions saying that Greece should concentrate on applying the aid plan.

Market participants however, remain firmly in the ‘glass half empty’ camp waiting for confirmation of some degree of debt adjustment.

Greece are attempting to raise just over €1 billion today via a short term bill auction and the outcome of the sale will be crucial to market thinking going forward and bond yields are telling the story.

The Euro remains vulnerable to developments from the Greek situation.

Bank of England warned over raising interest rates too soon

A report this morning suggests the Bank of England risks pushing inflation higher if it looks towards a rate rise over coming months. Bank of England warned over raising interest rates too soonThe Ernst & Young Item Club suggest higher rates would push up mortgage costs and increase the RPI measure of inflation which is commonly used in wage settlements.

E&Y think the Bank risks starting a wage-price spiral if they raise rates, as employers are put under increasing pressure to increase wages as inflation rises.

The Bank also releases minutes from the last meeting on Wednesday. The markets are looking for another MPC member to join Dale, Weale and Sentance in voting for a rate increase.

Although unlikely, if the vote shows 5-4 Sterling will rise as traders build in the prospect of a rate increase as early as next month.

Finland may have thrown a very large spanner into the works of the proposed bail out of Portugal.

True Finns, a Euro-Sceptic party are on course to secure enough of the vote to be part of the new coalition government.

Finland requires majority parliamentary voting to approve major EU decisions.

The EU bail-out funds requires unanimous approval from its 17 member states to proceed and the worry is that required majority will not be achieved, potentially delaying any deal.

With a lack of Eurozone data this week, the focus will fall on Eurozone banks and financial institutions if the Finns fail to reach agreement over the next few days.

Wise money market sentiments sink against US Dollar

The US Dollar is struggling to stay above it’s November 2009 low around 74.17, with little sign of a change in fortune. Wise money market sentiments sink against US DollarA shock rise in weekly jobless claims to 412k (380k expected) did nothing to help the Greenback’s efforts as higher commodity prices, and in particular energy prices played negatively.

Undoubtedly, many US Dollar pairs have entertained an increase in sensitivity to oil price movements over recent weeks, with the USD falling on the wrong side when oil prices move higher.

The commodity currencies e.g. Canadian Dolar are the key beneficiaries but EUR/USD is also strongly linked with the price of oil.

Various Fed comments this week including supportive comments on the USD’s role as a reserve currency have had little effect to boost the view on the dollar despite the generally hawkish slant.

The capability of the single European currency to survive a flood of dire news from the eurozone periphery continues to surprise.

Above all, peripheral bond yields carry on rising especially Greek yields as expectations of debt restructuring develop.

Remarks from Germany’s finance minister have added to such expectations.

Reports that the Bank of Spain accepted the recapitalisation of 13 banks and that Spanish banks lent only EUR 44 billion last month, the lowest since Jan 2008, may have provided some relief.

Is UK’s inflation fall just a blip?

The Pound has shrugged off disappointing retail sales figures and a surprise drop in inflation earlier in the week and is trading up against the Dollar and Euro this morning. Is UK's inflation fall just a blip?This is partly to do with the rise in British consumer confidence and positive employment data, but also is reflecting the fact that the market believes Tuesday’s CPI figure was merely a blip in the upward march of inflation.

The Bank of England has been working hard to keep our inflation expectations anchored recently, notice the increase in column inches of the MPC’s most hawkish member over the last few months.

But most of the subsequent reports by have been along the same lines: The fall in inflation is temporary and we expect prices to keep rising.

Does the market’s refusal to accept Tuesdays’ figure as a reversal in the inflationary trend mean the Bank of England is losing the battle of inflation expectations?

It means they are at least being questioned.

It also means the Bank needs to redouble its efforts in keeping wage and price growth expectations low and stable (unless you believe the conspiracy theory that the Bank is only aiming of nominal GDP growth).

Sterling continues to weaken against others

Sterling remains vulnerable to an upturn in risk appetite especially given the diminishing likelihood of a UK rate rise at the May MPC meeting following yesterday’s inflation figures. Sterling continues to weaken against othersThe headline YoY number was reported as +4.00% in March against expectations of a +4.4% outcome.

This trend will encourage the view persistently expressed by Mervyn King and most of his BoE colleagues on the committee, that the recent spike in inflation was just that.

He has argued for several meetings that the MPC putting rates up as a counter to a sharp rise in imported inflation, when the spike is expected to correct itself quite quickly, is a pointless exercise.

This opinion looks more likely to be borne out following yesterday’s data, but could easily prove to be a 2-edged sword for Sterling.

The reduced prospect of interest rate rises in the UK combined with higher yields elsewhere leaves the Pound extremely susceptible to further declines against the Euro and commodity focused currencies.

The much reduced UK trade deficit was a bright spot, but the implication derived from the numbers is that the pick up in exports was as a result of the weaker Pound; a scenario that has been touted by both the BoE and the Chancellor, which again suggests little enthusiasm for any recovery in Sterling for the time being.

Yesterday, it was the turn of a Fed hawk, the Dallas President Richard Fisher, to air his views on current policy.

In an article published by a German newspaper this morning, he was quoted as saying that the Fed risks having maintained a monetary policy that is too expansive adding that, ‘It can now hardly be disputed that US businesses have enough financial fuel in the tank to grow and create jobs’.

He said that the Central Bank did what was needed when financial panic broke out back in 2008, but that the situation was much different.

Debate at upcoming FOMC meetings will become more intense with both doves and hawks seeking to sway Bernanke’s thinking their way.

Wise money risk aversion boosts US Dollar

Currently the US Dollar seems to be rallying as risk aversion dominates investor’s strategies following more aftershocks in Japan and spiralling nuclear fears, with Japan raising the level of the nuclear threat. Wise money risk aversion boosts US DollarHowever, any relief from pressure on the US Dollar is likely to be short-lived given the somewhat dovish Fed stance in comparison to other central banks.

The European Central Bank rate hike last week underlined its contrasting attitude with the Fed, providing further support for the euro.

Nevertheless, it’s worth noting that markets have already factored in two additional quarter basis point rate rises in the eurozone.

If this is the case, it would suggest limited upside potential for the EUR unless the ECB becomes even more hawkish, which seems unlikely.

Given the FX market’s interest on yield and interest rate differentials, this week’s inflation releases in the US, Europe and UK as well as various Fed speakers will provide market volatility.

The dollar also appears to have been helped by last week’s 11th hour US budget agreement, which scarcely avoided a government shut down.

Any reprieve may prove to be temporary, given that there remains fundamental differences between Democrats and Republicans over medium to long term deficit reduction strategies.

Ultimately in the worst case scenario is the failure to increase the US debt ceiling if a deal is not reached by mid May.

Portugal remains in headlines after the country’s official request for a European Union bailout.

This week officials from the ECB, IMF and EU will be in the country to begin discussions on the terms and size of the aid package, with estimates ranging from EUR 80-90 billion.

FX markets have largely taken news of a Portugal bailout in its stride, but EUR/USD will continue to struggle close to the 1.45 level.