Articles from September 2011



German vote fails to lift spirits

German ratification of an enlarged eurozone bail out fund was supposed to calm market nerves going into the weekend.German vote fails to lift spiritsHowever sentiment remains downbeat in early trading today and we can expect equity markets and risk on currencies to continue to struggle this afternoon and in the early part of next week.

Today is the end of the third quarter and with financial institutions set to report earnings over the next couple of weeks there is usually increased volatility as last minute balance sheet window dressing taking place, so be prepared for greater than usually swings in parings today.

Markets remain sceptical that European politicians have the political will and ability to finally put this crisis to bed because of the fragmented nature of the political system between member countries.

This is why we are hearing strong words from across the Atlantic about the need to for further enlargement of the bail-out fund, its current size would not support both Spain and Italy and the Germans have explicitly capped its size at the current €440 bn.

The New Zealand Dollar, not often mentioned by Wise Money was the big mover in the currency markets overnight after Standard & Poor’s downgraded their credit rating one notch from AA+ to AA.

The Kiwi Dollar responded immediately, falling across the board and compounding its recent declines on the back of the deteriorating outlook for global growth.

Which- if you have gone to see the rugby world cup will make buying any more kiwi dollars more competitively priced.

All of the so called commodity currencies are closely correlated to the outlook for world growth and it is the recent revisions by the IMF and other agencies that are the main reason the strongly performing high yield currencys like the Kiwi and Aussie Dollar and the South African Rand has lost ground against Sterling and the Dollar.

Sense of optimism illuminates money markets

A sense of optimism looks to be filtering through the money markets at present. Sense of optimism illuminates money marketsThis derives from hopes that the European authorities will be able to ring fence Greece and steer clear of a much deeper and wider contagion to other eurozone peripheral countries than has already taken place.

This may involve a European version of the US Troubled Asset Relief Program.

A variety of other methods are being considered including covered bond purchases from the ECB, provision of 12 month liquidity by the ECB, a policy rate cut, banking sector recapitalisation and increasing the size of the EFSF bailout fund.

The consequence of such rumours have provided a slight Euro rally and asset markets however there is a long way to go before hopes turn into action.

The next few weeks will be essential to establish whether a firmer base to sentiment and the EUR can be established and markets will turn their attention to a meeting of eurozone finance ministers on October 3 and the European Central Bank on October 6.

Meanwhile national votes on changes to the EFSF bailout fund will continue with Germany’s vote on today.

While the vote is likely to pass it may draw attention to divisions within Chancellor Merkel’s party.

Without doubt, there is no room for any more distress especially given that the plans agreed by European officials in July have yet to be implemented.

If there is no solid action over coming weeks the EUR will come under renewed strain and indeed the risk is still heavily skewed towards more EUR weakness given the various disagreements between officials.

Nonetheless, the improved mood in the short term will likely help prevent the currency from sliding further for now and a base appears to be forming just under 1.35 against the USD.

Wise Money lurches from despair to euphoria

The huge gains in stock markets around the world yesterday were not mirrored in by corresponding moves in the currency markets, which saw only modest gains for Sterling against the Dollar and Euro. Wise Money lurches from despair to euphoriaEuropean politics continues to drive sentiment between euphoria and despair as first a Greek deal looked to have been reached, before this morning we find out there is still huge disagreements between member states over details of plan.

The Euro ship is lurching from side to side as traders and investors rush from one side to the other on the back of every new announcement.

On one side German officials have been joined by other creditor nations, Finland and the Netherlands, in calling for the private sector to take on a greater slice of any write down.

On the other side sits France, who are desperately trying to keep losses away from their banks, who only just survived a recapitalisation after heavy falls in their share prices in the past few weeks.

With a lack of Sterling data this week and with the Bank of England meeting coming up next week, the MPC have all hands to the pump trying to warn the market of another round of quantitative easing coming either next month or more probably the month after.

Several members have indicated that they may join Adam Posen in voting for further monetary easing if the economic picture continues to deteriorate.

Careful not to push market expectations to far, the MPC hawk Andrew Sentence has also been in the press stating worrying about the inflationary effects of another round of QE.

What the Bank is making clear is the clear change of stance from a neutral wait and see, to a much more dovish tone and for Sterling that looks like it will be enough stall any sort of recovery against the Dollar in the near term.

Money markets calm amid default rumours

The money markets were calm in yesterday’s trading day as traders and investors alike attempted to interpret the rumours surrounding a Eurozone bailout package that started over the weekend.Money markets calm amid default rumoursStories have been popping up about a €1.7 trillion fund which would be aimed at saving the Eurozone and allow Greece to default on its £340bn debt pile.

This would involve propping up the banks that have invested in Greek bonds so that a controlled bailout can begin on the ailing country.

Further plans involve recapitalising Europe with tens of billions of Euros to reassure the markets.

UK Chancellor George Osbourne was forced to issue a hastily drafted statement after a British Treasury official outlined behind-the-scenes moves allowing a Greek default.

His comments insisted that Greece does have a recovery plan and must carry it out as he rejected claims that the G20 would allow a default.

The markets reacted with the Euro taking a small hit across the board, but also the US Dollar as some investors hastily moved funds from the so-called “safe haven” other  instruments.

Little volatility has occurred since then as everyone waits for any more news/rumours surrounding the main story of the moment.

The likelihood of Greece being able to follow its current plan and rebuild its economy seems unlikely and some sort of default or write down of their debt seems inevitable.

US Dollar gains continue

The US Dollar is gaining all the time given the current environment of increased risk aversion as seen in rise of US Dollar speculative positioning over recent weeks.US Dollar gains continueOne would think there is still ample scope for risk aversion to deepen but what does this mean for the Dollar?

The USD index is currently trading just over 78 but during the height of the financial crisis it rose to around 89, a further gain from current levels of around of around 14%.

The main barrier to additional Dollar potency in the event of the current crisis escalating is if the Fed employs QE3 however as the Fed has suggested this is unlikely to happen anytime soon, as “Operation Twist” is put into action.

As the Fed FOMC meeting is now out of the way, markets will also be less concerned of buying Dollars as the possibility of extra QE has weakened for now.

Headline news this week is expected be Dollar supportive too, with increases in consumer confidence, durable goods orders, an upward revision to Q2 GDP expected.

The single European currency remains highly susceptible to event risk this week.

We have various votes in Euro zone countries to support adjustments to the bailout fund will gather most notice in FX markets, with the German vote particular under the spot light though this should pass at the cost of opposition from within Chancellor Merkel’s own party.

The Euro may rally if there is some truth on reports of a three branched approach to help solve the crisis which includes ‘leveraging’ the EFSF fund, large scale European bank recapitalisation and a controlled default in Greece, however there has been no verification of such measures.

For the meantime, the possibility for talks between the EC, IMF, ECB and the Greek government to produce a deal on the next loan tranche for the country has increased, which could also offer the Euro a short term boost this week.

FED twists again like it did in 63

The US’s Federal Reserve Board (FED) has attempted to twist the US long term and short term interest rates to help jump start the US economy.FED twists again like it did in 63However there is another twist- this ruse  won’t actually do much to help consumers, borrowers or the housing market.

The Fed will go on a bond-buying spree — again — in an attempt to drive long-term interest rates lower than they already are.

The much-anticipated plan, dubbed Operation Twist by observers, should help push rates lower, boost the housing market, make it easier for consumers and business owners to borrow and help create jobs. That’s the Fed’s theory and intention.

But analysts say Operation Twist barely makes a dent in the problem.

There is plenty of liquidity out there already, and interest rates are already extremely low. Interest rates are not the obstacle to growth.

After a two-day meeting, the Federal Open Market Committee announced it will sell short-term Treasury bonds and reinvest about $400 billion in long-term Treasury bonds by the end of June 2012. It will sell Treasuries maturing in three years or less to buy Treasuries maturing in six to 30 years.

“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the Fed says in its statement. “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

Operation Twist differs from QE1 and QE2, the two quantitative easing programs the Fed previously implemented, because it will not require the Fed to print new money to fund the bond purchases. With Operation Twist, the Fed will simply shift its investments around rather than increase the balance of its portfolio.

Mortgage rates have been at their lowest levels in six decades, but millions of homeowners can’t refinance at the lower rates because they don’t have enough equity in their homes. Many potential buyers, who would like to take advantage of the low rates, don’t qualify for loans or are afraid to commit to a mortgage in a shaky economy.

The Fed said it will try to keep mortgage rates low by reinvesting in mortgage-backed securities as mortgages are paid off and as Fannie Mae and Freddie Mac repay debts they owe to the Fed.

Even if lower rates were the answer to dragging the economy out of the hole, Operation Twist still wouldn’t be enough to get the job done because its impact on long-term rates will be limited, analysts say.

Given the severity of the current crisis and the high unemployment rate, the United States needs the gross domestic product to grow at about a 5 percent to 6 percent pace, but that does not seem to be in the cards.

With so much doubt surrounding the effectiveness of Operation Twist, you may wonder why the Fed chose this maneuver. Simply put, it’s because the Fed had to intervene to show investors that it has not lost control of the nation’s economic situation.

And among the few tools the Fed had left in it’s shed, Operation Twist was the least controversial one.

Operation Twist met the least resistance among Fed members mostly because it differs from QE1 and QE2, the two quantitative easing programs the Fed previously implemented. Operation Twist will not require the Fed to print new money to fund the bond purchases.

With Operation Twist, the Fed will simply shift its investments around, rather than increase the balance of its portfolio- much like rearranging the deckchairs on the Titanic.

The Fed has more than doubled the size of its Treasury bond portfolio to about $1.65 trillion since the financial crisis started three years ago, and the Fed embarked on a bond-buying frenzy.

With more than 14 million people out of work, the unemployment rate stuck at 9.1 percent and no signs of improvement in the labor market, the Fed felt the pressure to act.

Bank of England to launch QE2?

Today we get to see if any other members of the Bank of England’s MPC have joined Adam Posen, long time advocate of further easing by the Bank of England, in calling for another bout of QE. Bank of England to launch QE2?The timing of the BOE minutes, coming after the IMF announcement yesterday, could not be better for the Government who are coming under pressure to reassess Plan A (Austerity) and allow more flexibility if the economic growth needed for success fails to materialise.

Indication that the Bank of England is considering further monetary stimulus will be very welcome indeed at the Treasury.

For Sterling, already under pressure against the Dollar and Euro this week, a move by the MPC towards further easing would almost certainly be another negative on what has seemed like a conveyer belt of disappointment over the last few weeks.

Talks between the ECB, IMF and Greek officials continue at a snails pace.

Greece needs another slice of funds to avert running out of money to pay wages, pensions and so on at the end of this month.

This is not the first time talks between EU officials and Greece have spooked the markets.

Less than three months ago we were in the same position, the Hellenic Republic needed to find deficit reductions to qualify for money.

Thankfully officials finally gave in, but continuing the game of chicken between both parties is achieving very little apart from cracking up the levels of worry in the markets.

The Euro seems to have regaining some of the Teflon it lost in the near 10 cent move a couple of weeks ago but will remain under pressure until the Greek deal is resolved when the EU and IMF eventually releases the funds.

The Fed will conclude their latest Open Market Committee meeting later today and equity and bond markets will probably remain directionless in the build up.

The Fed is expected to announce a plan to manipulate the treasury curve and hold down long-term interest rates but the market is unsure over the timing of such a policy and will be looking for clarification this evening.

As eurozone induced fear continues to spread, expect the US Dollar to continue to strengthen against both the Euro and Pound.

Italy’s credit rating downgraded

The US Dollar index remains strong, however it seems doubtful that the Greenback is being bought on its own virtues but rather on weaknesses in Europe. Italy's credit rating downgradedNevertheless, dollar sentiment looks to have turned a corner for the first time since last summer as long positions have risen, suggesting a change in attitude for the currency.

Obviously there are risks to the US Dollar including the possibility of QE3 being announced at this week’s FOMC meeting but this is highly unlikely.

On the contrary, the reversal in sentiment for the single European currency has been pretty spectacular. This reaction has accelerated overnight after the reports that Italy’s credit rating was cut by S&P in spite of the recent passage of an austerity package.

This over-shadowed any positives from the Greek Finance Minister as “productive” talks yesterday.

An additional conference call is planned today however the longer markets wait for approval of the next loan tranche the bigger the risk to the Euro.

Furthermore, Greek and Spanish auctions and ECB cash operations will be under the spot light and the Euro remains susceptible to a test of support at 1.3500.

Sterling has continued to struggle, having fallen by five percent since its high just above 1.66 one month ago. However, it has held its own against the Euro which has bigger problems of its own.

The fact that the Pound has been unable to capitalise on the EUR’s woes can be largely blamed on growing expectations of further UK QE.

Tomorrow’s minutes of the last Bank of England meeting will provide more clues as to the direction within the MPC for additional QE but its likely that the MPC will want to see the next Inflation data in November before committing itself to any further easing.

In the meantime, GBP will find it difficult to sustain any recovery, with its drop against the USD likely to extend to around 1.5583 in the short term.

Greek bankrupcy fears retakes centre stage

Greece will once again be the key driver in the markets for the week ahead as inspectors assess whether the Greek economy is on schedule to meet its debt obligations due next month and so avoid a default.Greek bankrupcy fears retakes centre stageEuropean Union and IMF inspectors are set to hold a conference call today with the Greek finance minister.

Doubts are growing that Greece are still not doing enough to align with the financial assistance provided.

Politically the pressures are growing with Angela Merkel the German chancellor losing another regional election in Berlin, in addition nine out of ten Greeks are dissatisfied with the governments handling of the crisis.

Last week the euro regained some lost ground and Greek two year notes improved for the first time in two months, this followed rhetoric from Germany and France to keep Greece in the euro area.

However this week we once again hit a crunch point and we will see what the divergence is between political will and confidence in the financial markets- Asian currencies have fallen on renewed fear on Euro debt as we kick start the week.

Elsewhere, we have seen a small gain in UK house prices for September in a survey by Rightmove- the Pound has marginally improved against the US Dollar and the euro on the back of this data.

Economic data will also be very important this week following the IMF and OECD pointing to a lower global growth outlook. The highlights will be Bank Of England minutes and Public sector net borrowing from the UK.

The minutes will highlight the thought process of the MPC and the potential for more QE in the future.

Central Banks lend US Dollars to help euro bankers

Yesterday saw the world’s main central banks announce joint action to provide US Dollar liquidity, aimed at securing the funding needs of euro banks struggling to meet american funding requirements. Central Banks lend US Dollars to help euro bankers The money markets had been showing signs of stress, with several measures at their highest level since the financial crisis.

The loans will have three month maturities in contrast to the normal one week limit in central bank market operations so banks are given time in the run up to the end of the year to finish window dressing their results without worrying about funding issues.

The news gave a boost to the Euro against the Dollar, rising almost 2 cents in the course of the afternoon before falling back in the overnight Asian session.

The announcement was also good if you own bank shares, which clawed back recent losses especially if you bought the French lenders after their recent crashes.

More than £4 billion was wiped off UBS shares, however, as losses of $2 billion were uncovered stemming from trades put on by rogue trader in their London office.

The bank has not announced where the losses were made, but there is speculation that it could have stemmed from trades in the Swiss Franc which moved over 10 cents in a matter of minutes after the SNB announced it was pegging the currency to the Euro.

Have UBS not announced where the losses were made because of the potential embarrassment of a Swiss bank losing money as a direct result of the SNB intervention?

What the news has done is presented an open goal to all of the advocates of the ICB report on the ring fencing of retail banks from the “casino” investment banking side.

The timing was impeccable, not only was the fraud uncovered 3 years to the day of the Lehman bankruptcy, but it came in the same week as the report was published.