Articles from July 2011



US Greenback continues to suffer on debt fears

The Dollar has made consistent losses this week and the continued stalemate on the subject of extending the US debt ceiling, the greater the problem for the currency. US Greenback continues to suffer on debt fearsWithout a doubt, it appears that the Greenback is taking the brunt of the pressure compared to other assets.

For example, although US treasury yields have edged higher, there appears no sense of panic in US bond markets.

Failure to agree on the debt ceiling does not naturally mean a debt default however it will increase the chances should an agreement not be reached in the weeks after.

Nevertheless, the impact on US bonds maybe countered by the increased potential for QE3 or safe haven flows in the event that no agreement is reached.

The worst case scenario for the USD remains no agreement on the debt ceiling ahead of the August 2 deadline but a short term solution that appears to be favoured by some in the US Congress may not be that much better as it would effectively be seen as ‘kicking the can down the road’.

The better than expected package to help resolve Greece’s debt problems last week dealt a blow to the USD as the almost perfect negative relationship between the USD and EUR over recent months.

Furthermore, the debt ceiling deadlock is making matters worse.

However, the situation can change very quickly and should officials surprise us all and find agreement the USD could rally sharply.

Things are not looking great for the EUR as most of its gains have mostly come by courtesy of a weaker USD rather than positive EUR sentiment.

The news hardly bodes well for the EUR, with data in the Eurozone looking somewhat downbeat.

For example, the Belgian July business confidence indicator dropped to a 9-month low in line with the weaker than expected outcome of the July German IFO survey last week.

In addition, there are still several questions about last week’s second Greek bailout agreement and contagion containment measures including parliamentary approvals and lack of enlargement of the EFSF which could keep markets nervous until there are clear signs that implementation is taking place successfully.

A clear indication that the EU agreement has failed to inspire as much confidence as officials had hoped for is the lack of traction in terms of narrowing peripheral bond spreads, with the exception of Greece.

This partly reflects a renewed ‘risk off’ tone to markets but this is not the sole reason.

UK economic growth not a poor as feared

The UK’s GDP economic growth figures were this morning expected to show only anaemic growth between April and June and rumours in the market suggested we may even see a flat or negative number. UK economic growth not a poor as fearedBut buy the rumour sell the fact works again as the number has come in only slightly worse than estimates at 0.7%.

Cable is up 70 pips against the Dollar and around 50 against the Euro on the news.

David Cameron set the scene yesterday for a disappointing number by warning that Britain’s road to recovery “will be a difficult one” and disagreed with Vince Cable who called for further quantitative easing by the Bank of England.

If the economy begins to falter again what will the coalition do to kick start it, if they have no money?

Further easing at the Bank of England looks unlikely, with only Adam Posen on the MPC currently voting for it.

And the fiscal cupboard is bare according to the Chancellor so a reasonably positive figure keeps Georges street cred high and unblocks a bit of the pressure that had been building over the last few weeks after a string on disappointing numbers.

Italy has cancelled a bond auction planned for August due to fears over the premium Italy is being demanded to pay by the market.

Yield spreads between benchmark 10 year German bonds and Spanish and Italian counterparts rose again above the key level of 6% (considered a key threshold on government debt).

Despite all the negative news, the Euro rose dramatically in overnight trading hitting 1.45 on the Euro Dollar and pushing below 1.13 and Sterling.

US debt deadline looms

Moody’s downgraded Greece to Ca from Caa1 and there is only 1 more notch to go before the rating sinks to rock bottom. US debt deadline loomsThis has coincided with a statement from the Institute of International Finance over the weekend which implied that they see the probability of a Greek default at virtually 100%.

This follows last week’s announcement from the EU of a second package of assistance for Greece which, upon reflection over the weekend, doesn’t appear to have any substance in the markets.

The Euro closed the week on the front foot and with the talks in the US on raising the debt-ceiling breaking up on Friday with no agreement, the scene was set for a strong week for the Euro.

Moody’s announcement however appears to have scuppered that, especially given additional comments released at the same time as the downgrade.

The ratings agency warned that the Greek package, cobbled together by the Eurozone Finance Ministers, would weigh heavily upon the ratings of other non-AAA sovereign states carrying overly high levels of debt.

This brings the likes of Portugal, Ireland, Spain and even Italy right back into the firing line, and the Euro along with it.

While the Dollar is side-lined during the ongoing negotiations and the Euro largely unloved, where does the short-term money go?

Ahead of expected weak UK economic data this week and expressions of concern over the effects that a Euro collapse will have on the UK outlook as a whole, Sterling is being largely ignored.

This leaves the Yen, Swiss Franc and the commodity currencies as the investments of choice.

Eurozone debts deal

A Eurozone debts deal appears as though the EU ministers’ main concern was to come up with something, anything, that would settle the markets and effectively ring-fence Greece so that contagion of debt concerns did not occur.Eurozone debts dealThe summit therefore did not disappoint with an agreed Euro 109 billion bailout emerging for Greece and statements that the European Financial Stability Fund would potentially be able to purchase sovereign debt in the secondary market and also have the ability to recapitalise Eurozone banks should the need arise.

In addition, private sector involvement in the bail-out was agreed with banks offering Greece longer maturities at improved rates on existing debt, to the tune of up to Euro 50 billion.

All very nice, although it is still not really clear how the latter is going to work and probably more important, how these changes will be viewed by the ratings agencies.

Wise Money feels that the EU hierarchy has already privately accepted that some degree of selective default will be forthcoming – the severity of default assessment will be all-important.

So, is the agreement the first steps in a long term solution that will establish a new Eurozone authority which will encompass fiscal consolidation and system wide risk management – I wonder if they will call it Bundesbank? – or will it emerge that it is just one huge sugar fix for the market.

Certainly, early reaction is just that.

The Euro surges, peripheral Eurozone bond yield crash and equity prices rise… All is rosy in the garden again, but the situation could turn again very quickly if analysis and expectation takes a turn for the worse.

Let’s wait for Moody’s, S&P and Fitch over the next few days.

Gloomy outlook for the UK economy

The Bank of England minutes yesterday presented a cautious, dovish outlook for the British economy with inflation expected to peak over the coming months- putting further pressure on household incomes.Gloomy outlook for the UK economyThe market has interpreted the minutes along the same lines as the past few, with the Bank now not expected to raise rates until the final quarter of the year.

Playing on the BoE’s mind will be the downgrading of UK growth estimates, with the economy now forecast to grow at just 1.3% in 2011. It looks like the Rogoff & Reinhart description of the aftermath of financial crises – sluggish growth for an extended period – is far more accurate than the market initially gave it credit for.

Data this morning was mildly positive, with Sterling up slightly on the back of better than expected retails sales data.

The Euro was boosted as details of a last minute deal between France and Germany hit the wire late yesterday evening and will be submitted to Herman Van Rompuy this morning at the meeting of European leaders.

No details of what the agreement is but it will likely be over private sector burden sharing in any further bail-out of Greece.

The market will be hanging on every word that comes out of today’s meeting so expect further volatility and rumours throughout the day on the outcome, but the reality is that no new information is likely to emerge.

The market will also be closely watching the outcome of Spanish bond auction this morning for both market confidence and to see if the ECB is active in buying bonds.

Bank of England thoughts on interest rates

The Bank of England’s MPC minutes on interest rates were released this morning with no real surprises among the announcement. Bank of England thoughts on interest ratesThe committee voted 7-2 in favour of keeping the base rate at 0.5% while as usual; only member Adam Posen wanted an increase in the quantitative easing measures from the current £200bn.

The views on future inflation were largely the same as previous meetings with price rises being monitored closely while growth outlook suggested underlying gains in Q2 with some softening in Q3.

The overall opinion is that little has changed since June’s meeting and this was reflected with Sterling moving back to the levels it opened at this morning.

The Eurozone has another data light day today with most movements coming from investor opinions and sentiment.

The ongoing debt issues remain with the IMF and ECB still trying to hammer out a second bailout for Greece.

The US received some positive news last night with President Obama reporting that a proposal for cutting $3.7 trillion from the US government deficit including an immediate $500bn deficit reduction is edging closer to conclusion.

The cut would include both tax hikes and spending cuts with President Obama calling it a “significant step” in the crunch talks.

The news though will be overall negative for the Greenback as it may rule out a default (which was never going to happen), but it will mean having to print more Dollars and therefore, weaken the currency.

Twin debts crisis continues

It was a turbulent day for markets yesterday, as they ponder over the escalating European debt crisis and the evident failure to reach agreement on raising the US debt ceiling. Twin debts crisis continuesAs it stands Europe’s crisis looks to be going from bad to worse, as suggested in the record breaking higher costs of French, Italian and Greek debt yesterday.

The situation reached breaking point as Italy suspended trading on government and corporate bonds following last weeks release of EU stress tests.

The panic led to billions wiped off the value of European banks with the UK alone losing £6.3bln with Lloyds falling 7.5%, with RBS and Barclays losing 6% and 3.7% respectively.

Despite Italy grabbing the headlines attention is still very much focussed on Greece and reaching agreement on a second bailout for the country, with further discussions at the special EU summit on Thursday.

The hot issue remains the extent of private sector participation in any debt restructuring.

The assessment to improve the flexibility of the EFSF bailout fund to embark on debt buybacks has not helped.

As a result contagion risks to other countries in the Eurozone periphery are at a heightened state.

In spite of this the EUR has shown a degree of resilience, having failed to sustain its recent drop below 1.40 versus USD and currently trades at 1.4156.

A possible reason for the EUR’s bounce is that the situation on the other side of the pond does not look much better.

Murmurs of QE3 in the US and the stalemate between Republicans and Democrats on budget deficit cutting measures tied to any increase in the debt ceiling are limiting the Greenback’s ability to profit from Europe’s distress.

Furthermore, more weak data including a drop in the Empire manufacturing survey and a drop in the Michigan consumer sentiment index to a two-year low, have added to the worries about US recovery prospects.

Euro bank stress tests underwhelm money markets

On Friday wise money saw the release of the widely anticipated results of European banking stress tests. Euro bank stress tests underwhelm money marketsAll the UK banks passed, with RBS posting the lowest Core Tier One ratio under the so-called adverse scenario.

8 of 90 banks failed the tests, which was around the number estimated before the results were announced but rather worryingly a further 18 barely scraped through.

We expected volatile Euro trading this morning on the back of the uncertainly that the stress tests provided and that is exactly the case.

The Euro was off over a cent early in the session but has regained ground over the last hour.

The main criticism of the tests is the lack of clarity that the models reveal about the institutions being modelled.

The tests did not allow for a default by any of the bailed-out nations (although they would have been run behind the scenes) and many in the market believe getting the information out in the open would be better for the banks in the long term.

Th US Dollar movement is almost all political at the moment.

The trinity of Europe debt worries, the impeding debt ceiling hike (or not if certain republicans get their way) and trying to second guess the Fed over QE3 is meaning we are experiencing huge movements in the Dollar as new information on each is revealed.

Unfortunately we are no clearer to a resolution in any of the main drivers of the USD and we can expect volatile trading to continue.

A US default would be catastrophic, but there is a real possibility that it could happen so USD buyers and sellers should keep a close eye on the rate and consider hedging their bets if this continues.

Wise money markets stressed by euro bank test results

A real jumpy session in the US last night with Standard & Poor’s decision to join Moody’s in placing the US long-term sovereign rating on creditwatch negative countered by Ben Bernanke’s follow-up testimony, within which he played down the probability of the introduction of a further tranche of monetary stimulus. Wise money markets stressed by euro bank test resultsThe Dollar’s value swung sharply back and forth within a tight range, ending the New York trading day very little changed.

This then gave the Asian market little cause to push the currency around, which was in fact the case.

Europe arrived this morning with exchange rates having barely shifted from where they had been left yesterday which, with no European data scheduled, doesn’t bode well for early volatility.

That’s not to say that the session won’t provide some excitement.

At 5.00pm this afternoon, the results from the latest round of European banks’ stress tests are published and traders will await their publication with a high degree of trepidation.

Rumours abound of selective disclosure and poor results from several of the institutions based in the peripheral countries of the Eurozone.

The reports should include details of sovereign bond holdings which, in the current climate, could create a fair amount of disquiet over the health of the banks in question.

This in turn will raise doubts over the resilience of each country’s banking sector to an escalation of the current debt crisis.

This in turn must leave the Euro vulnerable today, even though any results are unlikely to be released until after most traders have closed their books for the week.

For economic data, we will need to await US opening and like yesterday, there is a raft of top tier numbers scheduled for release.

Market analysts are predicting a stronger outcome across the board which, if borne out, will undoubtedly lead to a firmer Dollar as we approach the weekend.

Ben wants more QE but Obama doesn’t

After dipping briefly  under 1.60 over the past week, the Sterling-Dollar pair snapped back sharply in late trading last night as firstly Fed Chairman Ben Bernanke refused to rule out further QE and secondly, after threatening to do so last month, Moody’s placed the US on review for a downgrade of its credit rating. Ben wants more QE but Obama doesn'tAlthough Mr Bernanke did not outline much more than the market already knew from the minutes from the last Fed meeting, the fact that the words came from his mouth and not in text seemed enough of a reason for traders to sell the Dollar off against the Euro and Sterling, with cable jumping one and a half cents in quick time.

The potential ratings downgrade came as US President Barack Obama walked out of budget talks, raising the fear that a deal on raising the US debt ceiling before the US Government runs out of money is looking increasingly unlikely.

Later today US retail sales are due, and will probably show a modest decline, as retail sales ten to do over the summer months.

On Friday we also have the US CPI number and the U of Michigan confidence survey.

With EU banking stress tests due late on Friday evening, we’ve had the first indication that some of the banks are struggling to pass.

German public sector bank Helaba is rumoured to have pulled out, giving regulators a real headache the day before the results are due.

The key point in doing a second round of stress tests was their credibility, and the fact that it would cover all systemically important EU banks.

If Helaba pulling out marks the first of several banks following suit, the whole purpose of the project, namely to restore confidence in the European banking system will be undermined.

After the market volatility in Italian bonds and bank shares, this morning’s Italian Debt auction takes on more significance.

With many economists suggesting Italy is too big to fail, any sign of weakness will be magnified hugely.

Speculation is mounting that the ECB or Italian central bank may buy some of the bonds to signal to the market that demand is high and to keep yields suppressed.

As we know with Greece, Ireland and Portugal when the cost of insuring the bonds raises above 400 basis points bad things start to happen; both Spain and Italy remain around 300.

Even with all the negative Euro news, the news from the US yesterday evening has pulled the Euro higher against both Sterling and the Dollar.