Articles from October 2011

Europe suffers China bailout snub

The sentiment in the money markets shifted again over the weekend as China commented on the Eurozone’s planned bailout package. Europe suffers China bailout snubChina, which has taken even more focus lately as European leaders look towards the Eastern powerhouse to invest billions more into Europe to prop up the ailing economies and banks, have yet to confirm their position.

The most recent comments stated that China will co-operate and said “a prosperous and stable Europe is important to China’s stability and development”, but it will not be the “saviour” 0f indebted nations- handing over “dumb money”.

This is likely to keep French President Nicolas Sarkozy up at night as he has been on the phone to his Chinese counterpart saying Beijing has a “major role to play” in Europe’s recovery.

The euro loss some of the ground it made towards the end of last week as traders looked at the potential of this new bailout package failing apart.

Europe needs China to add at least €60bn on top of what they already have put in to make this new step in securing Europe’s future viable.

Without it, there aren’t enough willing sovereign states or wealthy individual investors to progress and the top brass across Europe will have to look for yet another new way of saving the single currency.

The return of risk

What a day! Risk was forcibly thrown on the table as markets interpreted was most  had seen as just bare bones of a European rescue plan as reason to be cheerful,  and risk assets surged throughout the European session and overnight.  The return of riskLeading the way was the Euro, up two cents against the Dollar and Sterling and looking increasingly like it will continue to march higher.

Not far behind the way on were the banks, which contrary to every other industry that receives a recapitalisation managed to convince the market that getting €106bn to shore up creaky balance sheets it is a good, rather than negative development.

Also helping sentiment was the American GDP figure although only inline with estimates, reassured investors that the world’s largest economy is still growing, albeit at a sluggish pace.

Reports today suggest that euro leaders will go cap in hand to China asking them to be a significant investor in the European Bail-out fund.

This move which was widely expected given the size of China’s foreign exchange reserves and their perceived desire to diversify away some of the vast amount of Dollars they are holding.

The interesting thing will be finding out the political cost of the money – silence on the currency manipulator tag- or human rights perhaps?

Whatever the economic and political motivations behind the news will lend strength to the Euro as we move into the weekend.

Euro debt packages starting to emerge

Eurozone leaders once again put off decisive action to the region dent problems leaving the markets to trade and rumours and comments. Euro debt packages starting to emergeThe crisis, which threatens to throw the world into a new recession, has been the only subject of note for traders and investors as the markets remain volatile, but over a small range.

The summit, between 17 euro nations, led to the agreement that the bailout fund would be leveraged up to €1 trillion, half the €2 trillion the markets have been looking for.

This agreement is only in words though and no official number or method for achieving it has been announced.

The disagreements to derive over exactly how these funds will be raised and also the size of the haircut that banks and institutions will have to take on any Greek bonds they own.

The IMF was said to favour a 70% cut while the owners of the bonds are struggling to get above 40%.

Further chaos added came from Italy where politicians came to blows as they discussed austerity cuts for the country.

Rumours that Prime Minster Silvio Berlusconi will resign by the end of the year added fuel to the fire and the worries that Italy could be heading the way of Greece has grown severely over the last few weeks.

French President Nicolas Sarkozy and German Chancellor Angela Merkel have been meeting with banks in order to thrash out details of haircuts and asking the banks to raise funds.

France’s 4 largest banks are expected to raise €8.8bn with 13 German banks bring €5.2bn.

Also, Spain’s 5 largest banks will raise €26bn leaving 5 Italian lenders needing to produce €14.7bn.

This plus other banks across the Eurozone will raise a total of €106bn, with Britain’s lenders not raising anything to the total.

This capital will be used as reserves to cover the losses from any write-downs on sovereign debt held with each institution.

Until these agreements are signed, sealed and delivered with the fine print read through, we are no closer to being out of the woods to last week.

Wise Money eyes european saga

Pressure was mounting on Silvio Berlusconi‘s coalition government after it failed to agree on tough new EU measures aimed at reassuring the markets that Italy’s sovereign debt is on a sustainable path. Wise Money eyes european sagaThe measures include forcing the Italians to lift the pension age to 67, something that the coalition views as untouchable.

The news come on the back of rumours yesterday afternoon that today’s meeting of EU leaders has been postponed, which briefly caused a Euro sell off, before the single currency bounced back after it was confirmed that the meeting would go ahead as planned.

The markets are very quiet this morning, almost as if they are waiting for something.

The announcement will come this evening, fingers crossed we get definitive answers on all three lines of attack, the EFSF, bank recapitalisations and Greek hair cuts so the EU gets breathing space to address the more important problem of deeper fiscal integration.

UK’s David Cameron is facing a backlash from within his own party after half of his backbenchers dissented from the Government line in a vote over a referendum on Britain’s membership of the European Union.

The vote was defeated by way of support from Labour and Lib Dem MP’s, but the result was embarrassing for the Prime Minster because of the scale of the revolt from within the Conservative Party.

Unity within Government is being looked at closely by the markets and Mr Cameron cannot let any perceived cracks that are opening within the ruling party get any bigger, especially at a time of austerity in the wider economy.

Wise Money waits for euro politicians

Eurozone politicians already had a lot on their plate this week. Wise Money waits for euro politiciansBank recapitalisations look set to happen, albeit on the lower end of the scale, but both the enlargement of the bail-out fund and the size of Greek haircuts both need to be agreed by tomorrow.

Large problems to overcome by themselves, but made even harder because the 17 Euro member countries seem to have annoyed the remaining 10 members of the European union outside the Euro, who for fear of being marginalised now want to be at the crucial meeting on Wednesday.

The 10 countries involved at such an important meeting who, although suffering economically, are not even on the same page as most of the eurozone.

This can only make the decision making process harder, especially if they are only there to look out for their own interests in terms of ceding more power to Brussels.

Naturally the Euro is shrugging off all doubts over its future and continues to trade over 1.39 against the Dollar and is steady from yesterday versus the Pound.

The US Dollar fortunes over the coming days are almost completely tied to the success or failure of the EU meeting tomorrow.

We saw risk on yesterday in the American session with equities up across the board and the corresponding weakness of the Dollar after a decent European morning for the Greenback.

Positive PMI data from China and decent earnings lifted sentiment that has carried through to early trading today.

The British economy may already be contracting according to Martin Weale of the Bank of England’s MPC, who suggests 4th quarter growth in the UK, estimated at zero anyway, may be negative and indicate the onset of a double dip recession.

No doubt also justifying the MPC decision for further QE, Mr Weale was also much bolder than usual.

MPC interviews and highlights the real concern at the Bank that as things may be set to get significantly worse for the UK over the next year.

Money markets steady on eurozone debt plans

Money markets have held steady as they await details of an agreement to resolve the eurozone debt crisis.Money markets steady on eurozone debt plansStock markets and the euro rose in early trading before falling back.

Although a weekend summit of eurozone leaders was inconclusive, the outline of a deal was agreed, with a summit to finalise details set for Wednesday.

Eurozone leaders agreed to force banks to protect themselves against future losses, and to increase the firepower of the single currency’s bailout fund.

Following a robust rally in Asian markets, European stock markets had been up 0.5%-1% in the first hour of Monday trading on the apparent progress at the talks.

Asian markets had been lifted by positive data from China and Japan, as well as the apparent progress in Brussels.

But European markets later fell back, and by mid-afternoon trading the Cac 40 index in France and the German Dax were both fractionally lower, while London’s FTSE 100 was up just 0.3%.

Market sentiment was not helped by industry surveys released during the morning that suggested the French and German economies are still struggling to avoid recession.

However, key points of disagreement remain.

France had hoped that the European Central Bank (ECB) would support the EFSF, by providing it with loans that could increase the fund’s total capacity to 2tn-3tn euros.

But this idea was blocked by Angela Merkel.

Instead, governments are expected to agree that the EFSF can help out troubled eurozone governments such as Italy and Spain by providing partial guarantees to investors and banks who lend them more money.

There was also disagreement over the extent of losses that should be imposed on Greece’s lenders, with Germany seeking a 50%-60% haircut.

The ECB opposes any such increase, according to a footnote in an internal document on the Greek economy leaked over the weekend.

There are fears that a unilateral default by Greece – such as a debt write-off without lenders’ consent – could have unforeseen consequences, for instance by triggering payments under credit derivative contracts.

Another unknown element in talks is whether and how much non-European countries may provide support.

The price of copper – an indicator of market sentiment over the global economy – rose 6% in Shanghai trading. But after the markets opened in Europe, the rally lost some of its lustre.

The euro followed a similar pattern, rising half a cent against the dollar, before dropping back. By mid-afternoon in Europe it was trading at about $1.386, down 0.2% for the day.

Crunch eurozone debt crisis meetings start at the weekend

Eurozone finance ministers are meeting to discuss the region’s debt crisis in the first of several summits to be held in Brussels over the weekend.Crunch eurozone debt crisis meetings start at the weekendOn Saturday, ministers from all 27 EU countries will hold talks. EU leaders will then gather on Sunday and at an extra meeting on Wednesday.

They need to agree a second bailout for Greece, how to recapitalise banks, and a stronger bailout fund, before Greece can then be allowed to default- and there still appear to be deep divides between France and Germany.

In particular, the two need to agree on how to increase the firepower of the eurozone’s bailout fund, the European Financial Stability Facility (EFSF), from its current 440billion euros ( £383 billion).

France has proposed turning the EFSF into a bank so that it could borrow from the European Central Bank (ECB), but Germany has refused to sanction such a move, arguing it would compromise the ECB’s impartiality.

The German government has also promised its taxpayers that its contribution will not go above 211bn euros so is looking for a way to increase the size of the fund without increasing the liabilities of German taxpayers.

Despite no apparent movement on the deadlock, markets were trading higher, with the leading indexes in London, Frankfurt and Berlin all up between 1.5% and 2.7%, while US markets also rose at the start.

Jean-Claude Juncker, the chairman of the eurogroup and the prime minister of Luxembourg, said the delay to a deal portrayed a “disastrous” image of the eurozone to the rest of the world, adding that it was not necessarily just France and Germany that had differences of opinion.

This crisis has underlined that the EU, in large part, remains a Franco-German union. The other members of the eurozone appear as bystanders whilst the French and German leaders determine the fate of their currency.

A deal on the euro had been expected to be signed on Sunday, but France and Germany said they would not be able to reach an agreement by then and announced that leaders would meet again on Wednesday.

Sunday’s summit had already been delayed from 17-18 October because more time was needed to finalise a plan.

A second hurdle in the way of any rescue plan is that negotiations have not yet begun properly with private sector lenders to Greece on a further reduction of what the Greek government will repay them.

Banks have already agreed to take a 21% loss, or “haircut”, on their loans to Greece but there is growing pressure for them to accept higher losses.

Previous disagreements between France and Germany about the bailout plans have centred on how much the private sector would have to contribute to any package.

King views gloomy economic outlook

Bank of England governor Mervyn King was in a gloomy mood last night as he addressed an Institute of Directors meeting in Liverpool. King views gloomy economic outlookJustifying the BOE’s recent resumption of Quantitative Easing (QE), he warned that Britain’s economic recovery had been destabilised by events in the eurozone and urged European leaders to urgently recapitalise the banking system to restore market confidence.

He also took aim at surplus countries – read Germany and China – suggesting those countries running large positive trade balances need to share the responsibility of getting out the current mess by expanding domestic demand and letting deficit countries increase exports and service debt repayments.

This is not the first time that the Gov has wagged a disapproving finger in the direction of Germany and China, but combined with his gloomy outlook and yesterday’s inflation figure the whole situation looks fairly grim and Sterling remains under pressure this morning against both the Euro and US Dollar.

Several high profile businesses in the US either reported losses or missed profit estimates and this is weighing on sentiment.

Corporate profitability has been a beacon in a sea of gloom over the past few years and any sign of margins beginning to fall will be extremely negative for equity markets and risk assets like Sterling and the commodity currencies.

Reports continue to be rife about the size of the EFSF, with reports yesterday evening suggesting €2 trillion is the figure that has been decided on, news which has lifted the Euro across the board overnight.

But it still remains utter speculation, some think the number will be deliberately exaggerated to grab headlines, but given that this remains in large part a physiological battle between politicians and the markets, the larger the better in our opinion.

UK inflation still rocketing

UK inflation figures were published this morning showing that price rises are still rocketing.  UK inflation still rocketingThe CPI for September was up +0.6% and the year on year level up to 5.2%.RPI was also up +0.8% and 5.6% for year on year.

Normally, a strong inflation number indicates that interest rate increases could follow and thus we see a gain in the value of the currency.

However, we are not in normal market conditions and the uptick in inflation will not be reflective of future rate increases as the Bank of England expects inflation to fall back towards 2% in time.

The current weak growth that is threatening the UK’s recovery continues to overshadow inflation and with the risk of a double dip recession still lurking, the BoE has no choice but to keep interest rates low.

The fact that the number was higher than forecast is actually a negative for the pound and we have seen the pound dip against the US Dollar and slightly against the Euro since the numbers were released.

Late in yesterday’s trading, the Euro lost value as pessimistic comments from Angela Merkel dampened the positive mood that was building towards the October 23 summit.

Wise Money expects the euro and the US Dollar to be volatile ahead of the summit as the Eurozone leaders hammer out further bailout measures to support the single currency and some of its ailing economies.

It’s all about leverage in the eurozone

Things seem, for once, to be moving quickly in the eurozone. It's all about leverage in the eurozoneAfter high drama in Slovakia over ratification of the enlarged bail-out fund last week, this week looks set to be all about leverage.

More specifically, it will be about how the eurozone makes sure the EFSF has enough fire power to assure the markets that if things begin to unravel, Spain and Italy will be able secure funding without leaving the cupboard bare.

The plan gaining most traction was proposed by Allianz and involves the EFSF guaranteeing the first wave of losses on Greek, Portuguese and Irish bonds.

This would see the funds boosted to around €3 trillion.

Sounds good in theory doesn’t it? Except the structure looks eerily similar to the instruments at the heart of the sub-prime meltdown – collateralised debt obligations or CDO’s for short.

The CDO’s were supposed to spread risk around the system making it safer overall.

What they did, along with industrial scale securitisation was disconnect the borrower from the lender, mask the risks behind complex mathematical formulas and in turn removed all due diligence procedures about the credit worthiness of the borrower.

The risk with the EFSF insuring debt is that if we move back into a serious recession and other eurozone countries look to default because it is suddenly easier to do so, all the losses will simply have been moved from lots of smaller place to one huge pot.

Despite the worries over the structure of the newly enlarged bail-out funds, euro sentiment continues to improve and lift the Euro against both the Dollar and Sterling.