Articles from June 2011

Wise Money markets price in the odds of a Greek yes vote to euro

The Wise Money markets have made its move and has priced in a positive resolution for today’s crucial Greek vote on austerity due at 12:00 GMT.Wise Money markets price in the odds of a Greek yes vote to euroRisky assets and the euro have been subsequently bought back into and EUR/USD has pushed back up from 1.41 to 1.44 on the prospect of a yes vote.

The market is clearly in a situation of buying the rumour and a sell of the fact could be on the cards – the yes vote is not a foregone conclusion as the socialist ruling party only have a tiny majority of six in 300 seat parliament.

It is squeaky bum time for Greece and the Euro- for now.

Even in the light of today’s critical vote it is the Pound and not the euro which looks as though it has been through 12 rounds.

The beleaguered Pound has fallen 8.9% in the last year and covets the accolade of second worst performing currency among 10 developed market currencies behind the US Dollar according to Bloomberg.

So why is the pound so weak?

Well in a nutshell we have recently seen GDP dip further against forecasts, mortgage approvals are set to remain near a 4 month low in May (data due at 9:30) and interest rates are set to remain low.

However the nail in the coffin is the retail sector which is struggling and consumer confidence is waning fast- the Asda CFO summed it up well today in the Telegraph stating that British consumers are starting to ration as fear and uncertainty grips consumers.

This certainly challenges the government’s austerity plans- if this mood prevails, plan A will certainly fail as growth will be hamstrung by a lack of consumer appetite and with no plan B the UK could be in for a rough ride.

Wise Money markets wait for Greek vote

Wise Money markets traded quietly overnight and have continued the theme into this morning as nervy traders and investors wait for the result of the Greek vote of the recently announced austerity measures.Wise Money markets wait for Greek voteThe new rounds of cuts were required by the IMF and EU to release another tranche of bailout funds, without which Greece will run out of money by July 14th.

Pictures of protesting Hellenic republic workers dominate the news channels at the moment and the markets remain very nervous.

President Sarkozy is reported to have reached a deal with French banks over the rolling of Greek debt that the banks hold.

Reaching an agreement with the banks was seen as a key hurdle to overcome in keeping the Greek situation from falling off the edge of a cliff and the Euro is trading higher this morning on the news.

The final reading of UK Q1 GDP was released at 9.30, and Sterling continues its recent theme and is down once again.

The data showed that the Q1 reading was unchanged at 0.5%, but the year-on-year figure was 0.2% below estimates of 1.8%, and the Pound lost 40 pips against the Dollar and 25 against the Euro in quick order.

Over the weekend the Bank of International settlements (BIS) released a report about when Central Banks around the world should begin to raise rates towards ‘normalised’ levels of around 5%.

The BIS singled out of the Bank of England, citing almost 2 years of above target inflation and the threat of increased price pressures to come as reason to start to raise rates.

Central Bank’ generally rely heavily on credibility to manage monetary policy and thus will naturally come out all guns blazing to defend their actions.

Enter stage left the BoE’s arch dove Adam Posen, who this morning made comparisons of today with the 1930’s and how premature tightening then led first to social unrest and indirectly to the outbreak of war.

Scary stuff indeed- just look at the Greeks.

Politicians lead the wise money markets this week

Risk aversion is back on the menu with continued doubts over Greece and uncertainties about weaker economic data weigh heavily on market sentiment. Politicians lead the wise money markets this weekA number of key events rather than headline data will be the main drivers this week.

First on the agenda is the vote in the Greek parliament on the country’s budget reform plan, which if approved will pave the way for the way for a pay out of EUR 12 billion from the EU/IMF and a complete new bailout agreement.

Stateside and talks on raising the debt ceiling are likely to recommence, with the market likely to become increasingly nervous about the lack of agreement on the issue.

However, it is Europe that will be under the spot light and even if the restructuring plan is passed any market support is expected to be limited given the ongoing qualm about private sector contribution in any Greek debt roll over.

This suggests that the EUR will remain under pressure over the week despite supportive comments from Chinese Premier Wen.

Data releases will be relegated to background noise but what there is will not help sentiment.

Indications of slowing activity remain apparent as revealed in disappointing eurozone manufacturing surveys last week and this could be repeated in the US ISM manufacturing survey later this week.

Economic sentiment gauges in Europe are also set to reveal a decline.

Given the lack of fire power and/or unwillingness to risk using further stimulus from the Fed, the sensitivity of markets to weak data will be high, keeping risk aversion elevated.

Without a doubt, the end of the Fed’s QE2 this week will mark a major shift in market dynamics, especially in currency markets where the USD will finally see a massive weight lifted from its shoulders.

As indicated by Fed Chairman Bernanke following the FOMC meeting the Fed is not allowing for a further round of asset purchases, a fact that will help the USD to find firmer support.

Greek sovereign debts remains an ongoing issue

Positive news on the passing of further austerity measures in Greece met EU leaders meeting in Brussels yesterday evening.Greek sovereign debts remains an ongoing issueBut the speed at which the Greek budget found a gaping hole of €5.5 Billion should be as telling guide as to the spiral in which the Greek economy is stuck.

Austerity measures aimed at reducing the Greek debt burden, reduces growth and the ability to service the debt, leading to more cuts etc etc.

Leaders will no doubt be discussing how to structure an orderly restructuring of Greek debt, since any unordered default would immediately render all Greek banks insolvent and create massive uncertainty over other banks holding of Greek debt.

More worryingly still, it will put the spotlight on other PIGS- Ireland, Portugal and Spain and increase the probability of their own default or restructuring.

All of this uncertainty is feeding through to extreme Euro volatility.

The single currency is up in early trading after some positive German data at 9am assessing business conditions, and given that Asian Stock markets gains overnight we can expect America to follow suit this afternoon and the USD to slacken slightly, dragging the Euro higher into the weekend.

We are awaiting the Bank of England Financial Stability report which should not cause too much movement unless the Bank starts mentioning Euro-zone bank contagion in the event of a credit event in sovereign debt.

David Cameron announced that Britain will not be involved financially in any second bailout of Greece through the use of the ESFM as the bail out vehicle.

EU President Herman van Rompuy said funds from the ESFM “would not be part of the package”.

Sterling trades down against the Euro and broadly flat against the Dollar today.

With no Sterling related data due until next week, it will be events from the Euro-zone and US that dictate Sterling over the coming days.

FED’s Bernanke pontifications on the US economy

The Fed announcement did little to move currency markets during trading but there was a negative tone to stocks and commodities.FED's Bernanke pontifications on the US economyThe Fed did not show any interest in a third round of QE when this ends in June, but will maintain its balance sheet at around $,2800 billion.

The major worry for markets remains the length and severity of the existing ‘soft patch’ in the economy.

Bernanke believes it will be temporary but the fall in equity markets over recent weeks suggests that there has been a deviation between stock market expectations and reality.

The Greenback may in fact be hitting a medium term bottom with the fact that the Fed is not considering additional QE.

The negative Fed stance combined with a vigilant reaction to the Greek government’s passing of a confidence motion suggests that markets will remain watchful over the near term.

Without a doubt, comments by the Greek opposition that they will not support further austerity measures ruined any hopes of agreement and will add another obstacle towards an easing in Greek tensions.

The continued bickering between EU officials over private sector participation in any debt rollover in addition to uncertainty over how ratings agencies will respond, threatens to keep sentiment under pressure.

The EUR has remained surprisingly resilient but its muted reaction to the passage of the confidence motion has given way to some weakness and the currency remains a sell on rallies.

Sterling suffered yesterday, weighed heavily by the relatively dovish Bank of England MPC minutes in which some members were even discussing further QE.

The currency faces its toughest battle for months as it breaks through key psychological 1.60 level and currently stands 1.5987 and GBPEUR:1.1223.

Bank of England’s interest news reveals no surprises

The key event in the UK today was was the Bank of England’s release of June’s MPC meeting minutes.Bank of England's interest news reveals no surprisesAlthough the decisions by the Committee to keep interest rates unchanged and maintain the Quantitative Easing programme at £200bn were well anticipated, the minutes were used to determine the new dynamic on the Committee.

The vote came in at 7-2 to keep rates at the historic low of 0.5% new member Ben Broadbent, who replaced the arch-hawk Andrew Sentance, joining the ‘no change’ camp.

Comments in reaction to the recent soft reports for growth, both domestically and globally, combined with Sentance’s absence meant that the hawkish argument was less vocal.

The sentiment was echoed by the Committee leading to the minutes themselves being more dovish than expected. Futures have suggested a rise in rates is unlikely before late 1st quarter 2012 at the earliest. Not good news for Sterling, especially given its current weak stature.

Over in the eurozone- disaster has been delayed following the Greek parliament’s passing of a vote of confidence in the government and re-shuffled cabinet.

The vote’s ‘For’ numbered 155, the votes ‘Against’ totalled 143 – the exact numbers of the ruling socialist PASOK party versus the combined total of the opposition parties.

The Euro made cautious gains on the result, but focus has now shifted to next week’s additional austerity budget passage and more importantly, its implementation.

The 100% support for Mr Papandreou’s mid-term budget from his own party in parliament, given it almost certainly being deeply unpopular with voters as a whole, looks far less secure.

The clearance of yesterday’s 1st hurdle was just the start of what is going to be a very long steeplechase.

Of greater market concern however should be the apparent lack of real progress by the EU as a whole in cobbling together a new debt strategy for Greece and the resulting fear that negotiations might drag on.

Sterling tarnished by Pubic Borrowing figures

Sterling lacks any real direction at the moment as we wait for the release of the Bank of England minutes. Sterling tarnished by Pubic Borrowing figuresMervyn King used a speech last week to outline that the Bank had been targeting growth as well as inflation, and I think the speech was a primer for the markets to expect a dovish minutes tomorrow.

Public sector borrowing, just released, was mixed but overall negative and as a result Sterling is off around half a cent against both the Euro and Dollar.

Greece continues to dominate the headlines this week and today will be no different, with a vote of confidence due at 21.00 GMT.

The Greek government needs to pass the vote to receive another tranche of bailout funds.

Stock markets have opened down this morning and there is a general air of unease around, but the Euro has defied the odds and is strengthening against both the Dollar and Sterling.

The lack of substantive Euro zone data for the rest of the week means Greece will continue to hog the headlines.

The President of the ECB and Bank of England Governor are both due to speak on Wednesday evening but are unlikely to use the platform of a conference on systemic risk to say anything that could make the Greek situation any worse than it already is.

The Federal Reserve meets to decide US interest rate and, more importantly, the path of QE over the next year (or more).

Fed Chairman Ben Bernanke indicated a further round of QE is unlikely at the moment, but the market will be monitoring the press release closely for any hint of a change in Fed sentiment.

Will the Fed be influenced by recent stock market declines on one side, and/or the US governmental debt problem currently playing itself out in Washington?

Probably not, but it is making the narrow path the Fed is walking even narrower.

Greek debts doubts cloud euro outlook

European Union officials decided extra financial support for Greece will come from both official and private investors, with the later being a voluntary rollover of existing Greek debt in accordance with the ‘Vienna Initiative’ of 2009.Greek debts doubts cloud euro outlookA resolution was struck after the ruling by Germany to ease its demands for private sector input in a debt restructuring and brought some temporary respite to markets on Friday.

The statement today that additional financial aid and a second bailout package will not happen until early next month has disappointed markets and as result we’ve seen cautious trading to start the week.

The responsibility is now on the Greek PM Papandreou to obtain approval for additional austerity measures after the recent cabinet restructure and in the face of a no confidence vote tomorrow.

In this instance failure to pass the confidence motion might incite a political crisis, leading to possible contagion across the EU.

Europe has set the Greek government until the end of this month to put into further budget cuts and asset sales, with failure to pass further austerity measures likely to lead to a delay of any bailout payments.

There will be plenty of racket about Greece over coming days, and is sure to dominate the EU summit in Brussels on June 23-24.

However in the meantime the EUR/USD looks like it will settle into a range over the short-term, with support around the 100 day moving average of 1.4165.

EUR speculative positioning is currently around its quarter average, with the market continuing to hold a sizeable long position in EUR/USD according to the CFTC IMM data.

The risks remains distorted to the downside as uneasiness about a Greek deal intensifies.

If the Greek Prime Minister survives a no confidence movement there could be some short term relief but tensions are expected to persist for a long while yet.

In addition, other eurozone countries are not home and dry as Moody’s declaration that Italy’s AA2 government bond rating is on review for possible downgrade.

Greece’s debts back in the spotlight

Greece’s debts were the subject as anticipated of the whole of eurozone who were talking up support of the system in general.Greece's debts back in the spotlightRumours of an agreement between the German Ministry of Finance, the ECB and the IMF over funding going forward helped the Euro establish a base.

However, the reprieve was short lived and negative sentiment returned.

News that the Bundestags want to delay its decision on further Greek financial aid until September was viewed with dismay, with the Eurogroup’s Chairman Juncker expressing the general concern that this was “not a good idea and risked accentuating the current problems”.

This morning, the Greek PM has re-shuffled his cabinet, installing a new Finance Minister, ahead of the vote of confidence motion scheduled for Parliament early next week.

This will be a vital period for the country as approval for the Greek government to push through the enhanced austerity measures are a pre-requisite for the IMF to release the July tranche of the bail-out package.

Despite comments from European officials to the contrary, the payment is not a done deal, and should next week’s vote in Athens not go according to plan, there could be some difficult conversations taking place.

The agenda looks more and more to be moving towards ways to contain the contagion from a Greece default rather than strive to try and prevent, what looks like, the inevitable.

Expect more positive Eurozone / Euro comment from parties with a vested interest today.

King’s speech warns of pain ahead

The Bank of England Governor, Sir Mervyn King, used his annual Mansion House speech to outline his view that the UK faces at least three more years of economic pain before any sustainable recovery takes hold.  King's speech warns of pain aheadHe also suggested that the Bank was actively targeting growth levels as well as inflation, suggesting the Bank had been correct in keeping interest rates at historic lows because by raising rates overall output could have been materially worse and hence the economic recovery even weaker.

Pessimism by Mr King was partially offset by Chancellor George Osborne who outlined plans by the Government to privatise the “good” part of Northern Rock – which includes customers deposits and loans – and keep the “bad” part including all of the toxic loans made in the period before 2007 on the governments books.

The sale is expected to raise around £1 billion for the Treasury, which is a small step in the right direction, but is small fry in comparison to the stakes in the other nationalised banks.

Sterling is trading down against both the Dollar and Euro this morning.

This is partly due to risk being taken off the table. European Bourses are down across the board and the USD is making major gains in the flight to safety.

It is also that UK retail sales have again disappointed – maybe Mr King’s own predictions will be more accurate than the Bank he leads.

Images of rioting in Greece helped Sterling gain versus the Euro yesterday afternoon, but in the grand scheme of market movements, this current drift higher is almost like the market ignoring the ongoing Greek saga.

The restructuring of debt or default by the Hellenic republic is, if not fully, at least partially priced into the Euro.

The prospect of further rate hikes and the long term trend away from the US Dollar is keeping the Euro strong against both the Dollar and Sterling.