Articles from May 2011

Euro worries wise money markets

It looks set to be a busy day for the Euro. Euro worries wise money marketsWe have a huge amount of euro data due, some of which is already out including German Retail Sales & Unemployment, month on month the figures were below target, but year on year were much better and in line with expectations in that order.

Also due is Italian unemployment and CPI, French Consumer spending and PPI and the Euro wide CPI and unemployment rate.

Given the perceived hawkish stance of the ECB, the CPI data should be watched closely.

A rate rise is much more probable in the Euro zone than the UK or US, and above target CPI will only increase the likelihood of another rise in interest rates in the next couple of months and that should begin to be reflected in the Euro rate against Sterling and the Dollar over the next couple of weeks.

The U.S. data calendar is also busy this week.

The highlight, as ever, is the non-farm payrolls number on Friday but we also see Consumer Confidence and ISM Manufacturing figures and Wednesday and Thursday.

As we come to the end of QE2 the US numbers are increasingly important in trying to gauge whether the Fed will embark on another round of monetary easing or begin in selling back some of the securities sitting on its massively enlarged balance sheet.

This has massive ramifications for the path of the USD – more easing should, in theory, be USD negative in the long run as more Dollars are created by the Fed, the converse is true if the Fed begins selling.

There are further complications, the risk is that the Fed begins monetary tightening to early and the recovery begins to stall, in which case QE3 may happen anyway.

It is this uncertainty that is weighing in the US Dollar currently.

Risk is the Word

The Greenback lost some ground as risk appetite increased but markets remain lively as attitude switches between ‘risk on’ and ‘risk off’.Risk is the WordAs US Q1 GDP was left unchanged as jobless claims astonishingly increased together with continuing Greece worries suggests that a risk off mood may filter into markets despite positive US earnings.

Although the USD has not particularly benefited from any rise in risk aversion lately, worries about the next IMF tranche being withheld from Greece will likely play more positively for the USD.

Nonetheless, lurking in the background and helping to keep the USD restrained is the Fed’s ongoing asset purchases as QE2 remains in place until the end of June.

Moreover US data disappointment points to risks that the Fed will only slowly embark on its exit strategy.

Additionally any agreement towards extending the US debt ceiling appears to be far off, and threatens to go down to the wire all the way to August 2.

US debt markets and the USD appear to be downplaying this issue at present but it remains a clear threat to US markets.

Continuing to limit any upside in the EUR is the fact that officials and markets continue to gyrate on whether Greece will or will not restructure its debt.

Apparent divisions between the view of some officials and the ECB are adding to the confusion whilst fresh worries about the IMF withholding funding for Greece will likely keep EUR/USD capped.

OECD confirms support for UK debt repayment plans

The head of a leading economic body- the Organization for Economic Co-operation and Development (OECD) has insisted he does support the UK government’s deficit reduction strategy after his colleague appeared to suggest the pace of cuts might be too fast.
OECD confirms support for UK debt repayment plansThe OECD’s chief economist Pier Carlo Padoan had said earlier that the UK might have to change it’s plans if growth stayed weak. But secretary general Angel Gurria said that would only be needed if there was “a very dramatic drop” in growth.

Asked later whether Mr Padoan’s words signalled a watering down of the OECD’s support for the government, Mr Gurria said: “Oh no, I was there.

“He was being questioned about a hypothetical example about a very dramatic drop in the rate of growth, and whether one would then have to change course.  He said that if there are some terrible results or whatever we’ll have to take a look at it. But no way was there any signal of a change in course.”

Asked again if the OECD backed the coalition’s deficit reduction plans, Mr Gurria said: “Absolutely. We think it’s the way to go. We have said that you should stay the course and continue to support this route.”

The Treasury said the OECD had never swayed in its support for the government’s strategy.

Conservative MP Matthew Hancock said: “Ed Balls’ credibility has today sunk to a new low. His typically misleading attempt to claim the OECD’s support has spectacularly backfired.

“The OECD, the IMF and every major business organisation in the UK support the Government’s plan.”

Speaking on Wednesday, Prime Minister David Cameron said the government had been right to prioritise deficit-reduction since coming to office and cited the fact market interest rates had fallen in the UK – while rising elsewhere in the EU – as “proof” of international support for its deficit plans.

UK’s GDP economic data meets expectations

The UK’s revised Gross Domestic Product (GDP) figures have just been published.
UK's GDP economic data meets expectationsThe data is in line with expectations and has no revisions with the figure staying at 0.5%.

Sales on the UK high street also held steady according to the latest release from the CBI, but the retail environment remains subdued as the pincer effect from reduced consumer spending and extremely elevated price pressures continues to eat into margins.

Almost on cue, MPC member Paul Fisher continued the Banks dovish outlook for the UK economy in a speech yesterday.

Mr Fisher emphasised it was the downside risks to growth that had led him to keep rates on hold and even consider if further loosening may be justified.

As well as the GDP figure, we have a large amount of other data out.

Christine Lagarde looks set to formally announce her intention to run for the vacant Managing Director job at the IMF as the Greek debt situation continues to dominate sentiment and newspaper inches.

On Monday the Governor of the Bank of France laid out the ECB view on Greek restructuring, why restructuring means default and what the dire consequences of following this path would be.

Reducing his argument into a couple of sentences will gloss over some details but you will get the gist of why the ECB seems to working so hard to stop any restructuring from happening.

Greece restructures, haircuts on bonds will be acutely felt by those holding them, which in order are: the Greek Banks (which would then need to be recapitalised or nationalised by the Greek government); Greek insurers and pension funds; the European public sector, European governments and the central banks – a default by Greece would be the equivalent of a tax on European taxpayers.

Finally, any restructuring would mean Greek bonds would no longer we usable as collateral for funding from the ECB, meaning Greece would need to tap the market for funds which would be either impossible or prohibitively expensive.

Net effect: Euro sentiment remains weak and the Euro is trading down against the Pound and Dollar.

US Dollar is least worst currency option at present

The US Dollar has risen by around 5% from the start of the month. US Dollar is least worst currency option at presentThe driving force is a result of higher risk aversion trading and increasing uncertainties about the Eurozone periphery have provided the currency a boost, albeit with the US Dollar effectively being the best of a bad bunch.

Poorer than expected Eurozone purchasing managers indices (PMI) added to the already delicate sentiment yesterday- with greater declines than expected, although still at levels that are high in absolute terms.

The single European currency continues to sell off at present, with a softer IFO likely to provide additional reason for markets to reduce long positions on the Euro.

The EUR/USD exchange rates is now eyeing up a drop below the key 1.4000 level, as the 100 day moving average level of 1.3972 expected to be broken soon.

More significantly in terms of sentiment drivers the despair in the eurozone periphery especially Greece remains the major threat to the EUR.

Despite work from officials in Europe and Greece, rumours of debt restructuring are rife as the market is far from persuaded, as reflected in the widening bond spreads.

The Greek PM’s effort to push through austerity measures in the Greek parliament yesterday by announcing accelerated asset sale plan and EUR 6 billion in budget cuts have done little to turn market sentiment despite the fact that at the least it shows a willingness to stick to the plan in the face of growing domestic resistance.

Sterling has also slid suffering in the wake of a resurgent USD and unconfirmed reports that Moody’s ratings agency is expected to announce that is placing 14 out of 18 UK banks on review for a downgrade.

Coupled with this news the UK’s PSNB came in at £7.713 bilion against a forecast of £5.353 billion- which is the worst April reading on record.

The Treasury is blaming a hit in one-off factors and the government making headway on cutting deficit.

Greek debt fears back in the headlines

Will the euro survive in its present form come 2012? Greek debt fears back in the headlinesGreece appears to be scuppering the chances of this and all the news since Friday related to its financial situation has been negative.

This has run alongside negative ratings action from Fitch and S&P plus the large scale protest vote at the Spanish elections.

Friday afternoon’s markets became fearful over the repercussions of a heavy defeat for the ruling Socialist party in Spanish elections on Sunday.

The fear is that the newly elected representatives will reveal a much worse set of budget situations than had been originally thought, putting the Governments austerity plans into jeopardy.

This morning, Fitch has downgraded the Greek sovereign rating by 3-notches from BB+ to B+ and retained its negative watch.

Fitch cited a greater risk that the EU/IMF funding will be delayed and added that they would regard any debt rescheduling as been a default event.

This news emerges with 2 negative news articles this morning.

The first, according to the Greek press, being that the IMF had suspended its quarterly review of the country’s fiscal consolidation programme until a time when further austerity measures have been drawn up.

The second article, which comes from Switzerland claims that without the next lot of funding from the IMF/EU by the end of June, Greece would be insolvent by 18th July.

Adding to the Eurozone financial uncertainty is Standard & Poor’s decision to downgrade Italy’s long-term rating outlook to negative from stable pointing to weak growth prospects.

With little Eurozone data released for today, the Euro has slipped back below 1.40 against the Dollar.

Mixed economic data leads to muddled markets directions

Strong UK retail sales figures, driven by warmer weather and the royal wedding, gave Sterling a lift in early trading yesterday. Mixed economic data leads to muddled markets directionsBut it was not enough to sustain the trend once America woke up and the Pound duly gave back any gains to finish the day broadly flat.

Once the dust had settled the consensus was that April’s data is likely to be just a blip in an otherwise disappointing trend.

Also yesterday the Bank of England’s chief economist, Charles Bean said the bank had accepted higher than target inflation in an aim to rebalance the economy towards exports and business investment and he suggested that to achieve their two percent target would have required a markedly higher bank rate and with it a higher level for Sterling.

What he was implying is that if the Bank had raised rates, the squeeze on consumers would have been worse than is now, and shows just how tight the path the bank is currently walking actually is. No Sterling data is due today and the next important figure is UK GDP figure early next week.

A large amount of data on the US economy was released yesterday.

Better than expected weekly jobs data and a very disappointing Philly Fed reading caused Dollar gyrations for most of the afternoon.

The market seems to be trying to work out what the end of QE2 means for the Dollar at the same time as trying to guess from the data whether there may be further on the horizon – and the result is high volatility across the Dollar pairs.

Next week sees US GDP figures from the first quarter so we may finally get see the market clarity of what direction it expects the Fed to pursue.

Wise Money markets quietly digest latest global economic data

Yesterday we heard the particulars of recent the UK’s MPC and the US’s FOMC meetings and we also had euro ratings action from Moody’s, with very little resulting movement.Wise Money markets quietly digest latest global economic dataThe Pound dropped slightly following poorer than expected UK employment data but only lost ground following hard fought gains from Monday and Tuesday.

The main points from May’s MPC meeting were as expected and indicated no change in voting from April’s outcome.

However, the meat on the bones was always going to be the interesting facet, and so it proved.

The minutes suggest that the majority of members on the committee remain in no hurry to raise interest rates and although it is apparent that a wide division in views still exists, it is obvious that more members remain concerned about the downside risks to growth than about the dangers of stubbornly high inflation.

Moreover with the most hawkish member, Andrew Sentance, now set to be replaced by Ben Broadhurst, who seems to have a more balanced view on the economy, the make-up of the MPC would seem to be moving even further towards unchanged policy.

As a result, interest rates in the UK appear set to remain at the current low levels until the Autumn at least, with the November meeting now touted as the favourite for a tightening of policy.

The FOMC minutes, like those of the MPC, produced nothing earth shattering as the Fed Chairman, Ben Bernanke, had already prepared the market for a less dovish stance in his first press conference although again, the detail, when you dug down, was more revealing.

Markets were surprised by the extent of the discussions concerning exit strategies with officials outlining several guiding principals for the process of normalising monetary policy.

It was also clear that the majority of voting members favour raising interest rates prior to any asset sales as a means of tightening liquidity conditions.

Moody’s were also active, downgrading by 1-notch the credit ratings of the 6 largest Danish banks on fears of declining financial resilience.

None of this dented the Euro’s continued strength however with Asian markets preferring to focus on a report in The Times of China’s continued appetite for Eurozone sovereign debt as a means to diversify its foreign currency reserves away from the Dollar.

Bank of England voted 6-3 to keep UK loans interest rates at 0.5pc

As expected, the Bank of England’s loans interest rates setting committee voted 6-3 in the last meeting where they left rates unchanged at 0.5%. Bank of England voted 6-3 to keep UK loans interest rates at 0.5pcThey also vote 8-1 to keep the Quantitative Easing process at £200bn.

The minutes also gave us a view into how the MPC is thinking with members Weale and Dale seeing a case for a rate hike as “finely balanced” given the weak real economy and uncertain outlook.

Their outlook for inflation has not changed over the month with near-term looking worse than February, but likely to fall in medium term assuming the banks rate rises in line with market yields.

Going back to yesterday, the UK inflation data was woeful and although the pre-release rumours had pushed up the expectation, the +4.5% headline and +3.7% core levels were both higher than expected.

The headline was the highest rate since October 2008 but more significantly, the core number is now higher than it has been at any time since records began back in January 1997.

Interest rate futures and gilts both moved sharply in sympathy with the ‘higher rates sooner’ scenario and Sterling jumped across the board.

The strength however was very short-lived and the Pound ended up weaker on the day.

Euro outlook remains weak to wise money

The probability of further ECB interest rate rises in the near term increased yesterday as the eurozone recorded another slight increase in the core cost of living index.
Euro outlook remains weak to wise moneyGiven the hawkish tones (although they were slightly less so at the last meeting) of the ECB, one would expect the euro to respond positively to the prospect of higher rates, but sentiment remains weak in light of a continuing story regarding the head of the IMF, Dominique Strauss-Kahn, and its potential impact on the ongoing sovereign debt issues.

Mr Strauss-Kahn was refused bail and will remain in custody until his next hearing on the 20th May.

In his absence EU financial ministers did manage to approve the £65 Billion bail out of Portugal, the IMF providing around one third of the funds (the other two-thirds are from the 2 bail-out vehicles set up by the EU).

Over in the US President Obama again called for Congress to approve increasing the debt ceiling to avoid what he described as a potential “devastating economic and financial crisis”.

Republicans are aiming for guarantees on deficit reduction before they agree to a hike in the debt ceiling and the inertia is beginning to worry the markets, given the estimated day that the government runs out of money is the 2nd of August.

The Federal Reserve minutes from their last meeting are due today at 6pm, as ever the markets will be looking for comments on the economic recovery (especially on housing and the labour market) and anything regarding the end of QE2 and the Fed’s strategy once the easing has ended.