Articles from November 2011



UK economy doesn’t look pretty

Fairly dovish comments by Bank of England officials and weak data will keep the Pound on the back foot over the short term. UK economy doesn't look prettyBoE governor King highlighted the risk of an inflation undershoot while Fisher noted that the BoE expanded QE by a minimum in October and can do more.

Yesterday’s Autumn statement was a mixed bag for the markets.

George Osborne announced two more years of austerity measures following official figures indicating that the national debt was spiralling out of control due to rising unemployment and flagging economic growth.

Fitch reacted by suggesting that the UK was now the most indebted AAA country in the world with the exception of Uncle Sam who lost their full status earlier this year.

The Greenback was dealt a blow by Fitch, the rating agency, as they changed their outlook on the US AAA long term rating to negative.

Nevertheless, Dollar reaction has been strong, with long positioning moving to multi week highs.

The Dollar could face a struggle from the rumour that the Fed is about to embark on a fresh round of QE by buying mortgage backed securities.

The strong start to the week in terms of risk appetite aided a brief Euro rally but the currency remains susceptible to event risk.

High among them the Eurogroup and Ecofin meetings this week, which will decide whether or not to approve Greece’s next loan tranche as well as EFSF leveraging options.

Development is expected to be restricted leaving the euro defenceless to a fall.

Under the spotlight today will be Italy’s sale of up to EUR 8 billion of Italian Bonds and the likelihood that the country may have to face a yield above the critical 7% threshold.

An increase in funding costs will not bode well for EUR sentiment especially following warnings by Moody’s about potential downgrades to sovereign ratings across the region.

At the time of writing there are rumours of ECB again getting involved in bond purchasing.

EUR/USD failed to follow through on gains overnight but as reflected in the IMM; speculative positioning may have some scope for further short covering given that the net EUR short position reached its highest since June 2010 last week.

Nonetheless, upside potential for EUR/USD is likely to be restricted to resistance around 1.3415.

Italians still selling debt allbeit at expensive rates

The Italian treasury released a small positive for the global markets this morning by announcing good demand of their latest bond auction. Italians still selling debt allbeit at expensive ratesWith the Italian debt market being the most closely monitored amongst all of Europe, these comments brought some relief to the recent run of weakness in the single currency.

The euro is by no means out of the woods, but at least it is potentially the start of a period of euro stability.

This followed yesterday’s reports that the IMF is planning a €600bn package to help Italy and a credit deal for Spain could be in the pipeline.

These rumours were played down by IMF Chief Christine Lagarde who stated that “the IMF can only make loans available when a government asks for them” and as yet, Italy hasn’t.

The euro has strengthened slightly off the back of this news though we are very far away from a long term resolution so any real gains for the single currency are unlikely in the short term.

Reports out today stated that the UK will fall victim to a second recession.

The consensus, by a leading economic forecaster warned that the rise in unemployment will further damage Chancellor George Osborne’s hopes that he will be able to meet his deficit reduction target.

The figures will make grim reading for the chancellor, who will deliver his Autumn Statement today.

This is followed by more bad news for the UK recovery with millions of public sector workers walking out on strike tomorrow; a move that will cost the economy an estimated £500m.

The markets will continue to move on any more news from the struggling debt nations and on any bond auction updates from the eurozone.

The week ends with the non-farm payrolls figure from the US which is always viewed as a key indicator for how the global jobs market is performing.

A busy week for the wise money markets

Last week saw significant risk aversion played out as stock markets dropped dramatically where as this week looks a little firmer. A busy week for the wise money marketsArticles in the Italian media suggest that the International Monetary Fund (IMF) is preparing a €600 billion deal for Italy in the event of deterioration in the debt crisis- this could provide market support in the early part of the week.

Further support may also come from reports in Germany that German Chancellor Merkel and French President Sarkozy are putting together a “Stability Pact” for euro countries similar to the Schengen agreement.

Nevertheless, neither story has been confirmed so as usual the prospect for disappointment is high.

The sell on risk on rallies environment is likely to persist for a while longer despite such reports.

As we end November market orders are likely to fall and liquidity is likely to thin with plenty of events and data on tap… volatility is guaranteed.

First up includes bond auctions in Belgium and Italy today and France and Spain later in the week against the background where Germany’s failed bond auction last week has added further anxiety in bond markets.

Under the spot light tomorrow will be a European Finance Ministers meeting, given the lack of steps forward on many issues especially on the subject of Eurobonds.

With risk appearing back on the menu, traditional risk currencies like the Euro and Aussie have rallied in the early part of the session.

One would expect any gain in the Euro to prove limited and weak if the European press reports are confirmed.

EUR/USD will find upside resistance around the 1.3412 level, while the risk of a downside test of support around its October 4 low at 1.3146 remains high over the coming week.

Kaiser Merkel’s turn in the firing line

A disappointing bond auction yesterday in Germany was a reminder to everyone of seriousness of contagion across the eurozone. Kaiser Merkel's turn in the firing lineThe reason for concern is if the core is being hit then there is no safe haven in Europe any longer.

However this may kick-start a reaction in German officials and realise that they need to act swiftly to provide solutions to the crisis.

Stock markets recovered overnight despite a huge drop in the Dow Jones, but markets remain nervous and rebound in risk assets could be brief.

Despite US data, it’s a pretty poor picture, in particular China’s HSBC November weaker purchasing managers’ indices coming in below the 50 boom/bust level.

Europe’s weaker purchasing manager indices emphasize the projection for recession while the news in Germany is both poor on the bond front and also on the data front.

A lack of liquidity due to the US Thanksgiving holiday will mean the markets are set for dramatic moves.

EUR/USD has already sustained a drop below the important 1.3500 level as even the underling strong Asian demand appears to have been pulled back.

More downside is expected but technical indicators suggest that it will be hard trudge lower, with near term support seen around 1.3285.

The near term range is likely to be 1.3285-1.3505 although given the US holiday the range may be even tighter.

Apart from the IFO attention today will focus on a meeting between Chancellor Merkel, President Sarkozy and Prime Minister Monti.

As usual expect a lot of hot air but little action. Also note there is a general strike in Portugal today protesting against austerity measures in the country.

Spanish borrowing costs rocket

Compare and contrast: the interest rate on the three month note issues by the Spanish yesterday was 5.11%, the interest rate on the US equivalent was 0.01%. Spanish borrowing costs rocketSpanish borrowing costs jumped from last month’s auction partly because we are in between governments and the incoming party is still unsure if it will be able to pass the necessary austerity measures to (hopefully) reassure the markets but also because eurozone sovereign debt markets are now completely dysfunctional.

The Euro, after a bit of a rebound yesterday, has opened today on the back foot because of the Spanish problems yesterday and also due to a story overnight about the potential renegotiation of the bail-out of Dexia Bank.

Chinese PMI was also lower than consensus estimates and risk sentiment, which has been falling over the past week, will be further reduced and that means US Dollar strength, Euro and GBP weakness and stock markets continuing to fall.

The Federal Reserve minutes from last months meeting were released last night, and in light of the US GDP revision downward yesterday afternoon were surprisingly neutral in tone.

Only one member, Chicago president Charles Evans, voted in favour of QE3 with several unnamed members suggesting further action may be warranted.

The mere fact that further easing was not ruled out was enough to produce a bounce in US equity markets before normal service was resumed in the asian session.

The Bank of England will follow their Central Bank compatriots in the US by releasing their own minutes from this months meeting.

Again the market will be looking for signs of further monetary stimulus early next month.

Usually tight fiscal and loose monetary policy translates into a weak currency, but Sterling has remained fairly steady over the last year.

The size of any further QE will  be an important factor in whether Sterling stays within or breaks out of it recent range.

US Dollar benefits from weak euro

The US Dollar continues to benefit from a growing ‘risk off’ attitude developing in the markets. US Dollar benefits from weak euroFurthermore, the recent improvement in US data, including October’s existing home sales yesterday reduced pressure on the Fed for additional QE, which in turn supported the Dollar.

We have an opportunity to see the Fed’s latest view on this subject during the FOMC minutes later this week, with the Fed set to keep the option open.

Despite the lack of union within the US Super committee to slash the US budget deficit by $1.2 trillion, this has not hurt the Greenback’s improvement as these talks were always expected to be difficult.

Further Dollar gains are possible but the speed of its upside move could slow.

Meanwhile Eurozone sentiment has deteriorated again, EUR/USD is holding onto the key mid-level of 1.35 in spite of several flirtations below here.

This is largely attributed to ECB bond purchasing which helped reduce some negativity on the single European currency however there are suggestions that the central bank has imposed a limit of EUR 20 billion on such purchases.

The Euro is not being helped by the continued rumours of a potential Euro break up regardless of the Greek PM Papademos downplaying the talk of a Greek exit.

Finally Sterling has become a problem child for the markets with the currency on track to test the October low of 1.5272.

The Pound will struggle to find support this week, with a potential dovish tone in the latest monetary policy committee (MPC) minutes likely to cause additional harm, with support from the MPC for more QE set to be exposed.

Ahead of the minutes, today we saw UK public sector net borrowing, excluding financial interventions, falling to £6.5bn in October.

The figure was down from £7.7 billion last year according to the ONS and slightly lower than expected, as growth tax revenue outpaced spending.

Sterling currently trades at 1.5656 against the Greenback and has also lost ground against the struggling Euro at 1.1560.

Spain becomes third EU country to get new government to deal with euro crisis

Spain became the third country in a month to throw out an incumbent government, with Mariano Rajoy’s conservative Peoples Party securing a landslide victory in elections last night. Spain becomes third EU country to get new government to deal with euro crisisThe win gives the new government a strong mandate to implement deep spending cuts totalling €40 billion aimed at reducing Spain’s deficit to 4.4 per cent this year.

Mr Rajoy has also pledged to liberalise the rigid Spanish labour market in an effort to cut unemployment and restore confidence in the international bond markets.

So far so good then, as the yield on the benchmark 10 year Spanish note has fallen slightly but still remains in the danger-zone of the 6-7% range.

The euro has opened the week relatively unchanged from Friday but we could be looking for it to weaken further today if stock markets remain on the back foot.

The Pound has started the week roughly unchanged against the Euro and Dollar but weaker than expected house price data overnight has seen Sterling fall slightly in early trading.

The UK government will use the data in announcing a huge new house building policy aimed at kick starting the ailing house building industry and take another step towards showing voters the coalition government does have a credible growth plan.

The scheme will also see tax payers underwriting first time buyer mortgages to secure demand for the new homes.

Data this week includes UK GDP on Thursday and the Bank of England minutes Wednesday.

Both will probably confirm the Bank plans to use more QE over the coming months to boost growth again.

In the US we also have GDP and the Fed minutes, which are more likely to show a muddling through of the US economy and that it remains in the corridor of uncertainty which further monetary action is deemed unnecessary but the recovery never really gets going.

EU data includes German GDP and a whole host of PMI inflation figures due on Wednesday.

Euro continues to slide down the toilet

The eurozone debt crisis appears to be spreading quickly, threatening to turn a regional crisis into a global crisis. Euro continues to slide down the toiletFitch rating agency stated further contagion would pose a risk to US banks.

As a result risk assets continue to be sold but interestingly oil prices are climbing.

Coupled with comments from the Bank of England that failure to find a resolution will lead to “significant adverse effects” on the global economy, it highlights the risks of both economic and financial contagion.

For some European countries this is becoming a crisis of confidence and a breakdown in political talks is resulting in an ever worsening spiral of negativity.

While Monti was sworn in as Italian Prime Minister and Papademos won a confidence motion in the Greek parliament the hard work begins now for both leaders in convincing markets of their reform credentials.

Given that there is no agreement from eurozone officials forthcoming, sentiment is set to worsen further, with safe haven assets the main beneficiaries.

EUR/USD fell sharply in yesterday’s session hitting a low around 1.3429.

Attempts to rally were sold into, with sellers noted just below 1.3560.

Even an intensification of bond purchases by the European Central Bank (ECB) failed to prevent eurozone bond yields moving higher and the EUR from falling.

Against this background and in the absence of key data releases EUR will find direction from the Spanish 10 year bond auction while a French BTAN auction will also be watched carefully given the recent increase in pressure on French bonds.

Having broken below 1.3500, EUR/USD will aim for a test of the 10 October low around 1.3346 where some technical support can be expected.

Slow growth outlook for UK economy

The UK’s monthly inflation report brought another set of disappointing expectations for Britain’s outlook over the next 3 years. Slow growth outlook for UK economyInflation is expected to fall rapidly in 2012 before dropping below the target rate of 2% in 2013 and 2014.

The report goes on to say the Bank predicts sluggish growth of around 1% for next year with the slump lingering into 2013.

Based on these forecasts and the Monetary Policy Committee’s dovish view, the forecast is for £50 billion more of quantitative easing in early 2012 and a further £25 billion towards the middle of the year.

This is on-top of the extra £75 billion extension to the asset buying programme.

BoE government Sir Mervyn King warned “We have been going through extraordinary times and in such circumstances, there are limits to what domestic monetary policy can achieve”. All in all, a pretty dim look going forward for the UK.

We also had the UK’s Retail Sales figure for the previous month released today showing a 0.6% increase MoM.

This had very little effect on Sterling as the markets are continuing to move on the bigger issue surrounding the European debt crisis.

The euro has remained weak on the back of this while the Greenback has continued to strengthen as investors look for a safer place for their money.

Euro destined to fall

A vote in Germany to sanction a measure for a debt-stricken country to leave the single European currency could open can of worms and could be detrimental to euro sentiment. Euro destined to fallThere are several data releases on tap today that will provide some short term influence on the Euro, including Q3 GDP and the November German ZEW survey.

Investors will likely pay no attention to an encouraging reading for GDP given the negative outlook for Q4. The forward looking ZEW survey will record a further drop highlighting the risks to Europe’s biggest economy.

Spanish and Greek bond auctions may gain even more attention in the next few weeks.

This is following on from yesterday’s Italian debt sale in which the yield on 5-year bond came in higher than the prior auction but with a stronger bid/cover ratio, markets will look for some positives from today’s auctions.

Even if the auctions go well, on balance, relatively downbeat data releases will play negatively for the euro.

When viewing the euro against what is implied by interest rate differentials it is very evident that the currency is much stronger than it should be at least on this measure.

Both short term and long term yield differentials between the eurozone and the US reveal that EUR/USD is destined for a fall.

Europe’s yield advantage has narrowed sharply over recent months yet the euro has not weakened.

Some of this has been due to underlying demand for European portfolio assets and official buying of Euro from central banks but the reality is that the Euro is looking increasingly susceptible to a fall.

EUR/USD is poised for a drop below the psychologically important level of 1.35, with support seen around 1.3484.