Articles from February 2012

Wise money markets take a punt on risk again

Encouraging economic developments provided wise money markets with an appetite for risk again. Wise money markets take a punt on risk againDespite weaker than expected US durable goods orders, a rise in US consumer confidence to its highest since February last year provided stock markets and risk assets with an overall a boost.

It was a similar story in Europe as Italy held a successful auction of 10-year debt at a lower than expected cost at the same time as Portugal approved a third review of its bailout agenda.

However, there was some negative news, with the ECB momentarily deferring the eligibility of Greek bonds as security for its backing and Eire calling a referendum on the European fiscal compact.

Nevertheless, expectations of a strong take up at today’s ECB second 3-year Long term refinancing operation (LTRO) should keep markets on the straight and narrow for the rest of this week.

As for the US Dollar and given the upbeat equity market mood overnight it is no shock that the Greenback was on the slide as the euro appears determined before today’s 3-year LTRO by the ECB.

Bernanke’s Semi-Annual Monetary Policy Report later today will provide the Dollar some bearing but no major surprises are expected.

The euro will continue to rally against the US Dollar if we are correct about a strong euro 600-700 billion take up at the LTRO but it will interesting to see if the 1.35 level can be breached.

IMF waiting for European lead

This week is likely to be a much calmer and quieter affair in comparison to last week which brought the ongoing Greek debt crisis to a close for the short term. IMF waiting for European leadWhether this will last remains to be seen as the struggling nation will have to renew future debt deadlines in addition to steering through an election in April.

Expect the euro to trade in limbo as traders decide on their view over how successful this latest deal will be.

Comments have been coming thick and fast from finance minsters around the world with statements ranging from ultra positive to cautious.

The G20 met in Mexico over the weekend with the topic of Euro contagion at the top of the agenda.

The eurozone countries pledged to reassess the strength of their bailout fund in March, which would clear the way for other G20 countries to contribute via the International Monetary Fund.

The G20 said “This will provide an essential input in our ongoing consideration to mobilise resources to the IMF”.

Data this week comes mainly from the States with US durable goods orders on Tuesday, GDP on Wednesday and jobless claims on Thursday.

The US government will be expecting positive figures across the board as they continue to spend their way out of recession to attract growth.

Eurozone currency rises on Greek debt hopes

The euro currency is enjoying a healthy bounce after the completion earlier in the week of a further Greek bailout to cover March debt obligations and through positive German data. Eurozone currency rises on Greek debt hopesData from Germany showed that GDP had shrunk in Q4 by 0.2%, however strength in recent ZEW and IFO surveys suggest that the economy will escape falling into recession.

The euro was also helped by good news from over the pond as weekly US jobless claims came in unchanged at 351k and this level remains the lowest since 2008. This number has helped to boost the expectation that the approaching Non Farm Payrolls on Friday 9 March will better than market expectations.

Recently US data has started to show signs of improvement as the powerhouse that is the US economy looks as though it is slowly clawing back to growth.

For the markets this improves the appetite for risk and currently this is USD negative.

We have seen EUR/USD especially push higher and test 1.34- the highest level since December, GBP/USD has also edged higher but the pound remains a little subdued.

Wednesday’s MPC minutes helped to put a dampener on the Pound as expectations rose for further QE in 2012- probably in May.

With inflation falling and economic growth struggling then QE remains very much on the table with a cocktail of low interest rates to remain.

The Pound has fallen on the back of this market feedback and is struggling to gain momentum even in a sentiment which has turned risk on.

Bank of England votes for more Quantitative Easing

The Bank of England voted as expected to keep interest rates on hold and this decision was achieved with a unanimous 9-0 decision implying that the base interest rates will not be rising anytime in the near future. Bank of England votes for more Quantitative EasingA slight weakening factor for Sterling as an increase to the interest rate would add to the underlying value of the currency.

This hardly came as a surprise as an increase in the rate would cripple growth in what are troubled times.

The more interesting vote was the 7-2 result over quantitative easing.

Seven members voted in favour of the £50 billion extra that has been pumped in while 2 members (David Miles and Adam Posen) wanted £75 billion to be added.

This caused most of this morning’s weakness in Sterling as there is potential that more QE could be pushed into the UK economy.

The BoE also sees credit remaining tight and looks for global growth to weaken.

Wise Money had to mention the Greek saga which seems to be coming to a close, but the main talking point will be if problems re-open looking ahead to the rest of the year.

It is thought the new loan of €130 billion will cover Greece in the short term, but what will happen when that starts to run out.

Various countries that form the IMF are looking for officials from the European Union, ECB and IMF to monitor the Greek government from Athens and make sure the cuts actually take place.

Wise money waits on Greece default deal

Wise money markets will be influenced largely by developments in Europe to start the week, however President’s day in the US could be mean a quiet start. Wise money waits on Greece default dealOngoing US data continues to finish above expectations as shown by the latest gains in retail sales, manufacturing surveys, jobless claims and industrial production.

The overall recovery is gaining momentum and the Greenback is at last showing some signs of a rally on the news.

Increasing US bond yields have offered the Dollar some momentum, although the momentum has been curtailed by elevated bond yields elsewhere.

However, in spite of continued rumours of further Fed stimulus the Dollar appears to be somewhat on a stronger path in the short term.

In a fairly quiet week of headline data with the US being closed housing data will be the main item for digestion this week.

Over to the never ending merry-go-round of the second Greek bailout.

If approved and the deal goes ahead, the week should begin on a positive note for the single European currency.

The euro rally will be influenced by the release of flash February purchasing managers’ indices (PMI) and the German IFO business confidence survey.

On the other hand, conjecture of a Greek euro exit will not recede swiftly and investors will likely revolve between ‘risk on’ and ‘risk off’ based on the latest views from Greek or European officials.

Everyone should hold on it could be a rollercoaster ride this week.

Money markets drift on Greek dithering

The money markets entered Friday in limbo as investors and traders await the latest news from talks between Greek officials and Europe. Money markets drift on Greek ditheringHope rose overnight as comments of “We are almost there” were stated.

The general view is that an agreement has to be reached as the deadline for Greece to receive the latest transfer of EU/IMF funds to avoid a default on its loans closes in.

A default would be catastrophic for Europe with the ECB potentially having to support the banks that have purchased Greek bonds.

Otherwise, these banks could become insolvent and that could lead to a second credit crunch in the Eurozone.

Earlier today, we had the release of January’s retail sales figures for the UK showing a 0.9% jump on the previous month.

Obviously, the sales will have been affected by the slashing of prices by stores over the period after Christmas and this has been taken into account as Sterling hardly moved on the back of this number.

Euro heading for a fall?

The fact that the second bailout for Greece appears to be stalling means markets will remain anxious, leaving risk assets susceptible to further falls. Euro heading for a fall? The Greenback will be the main benefactor in these conditions.

Poor Eurozone growth figures for Q4 2011 released today will compare with relatively firm data including industrial production and the Empire manufacturing survey in the US, leaving the story of US economic recovery unharmed.

The single European currency has lost some momentum and looks open to to additional falls lower.

The fact that EU finance ministers have cancelled a summit due to be held today means that markets will have to extend their wait for an agreement on a second bailout deal for the Greeks.

Reports that Greece’s political leaders will send a pledge to European officials today that they will apply more austerity measures will provide some hope that things are moving in the correct course but an ominous cut-off date for debt redemption in March will mean increased anxiety.

Investors are still shorting euros although positions have moved close to its 3-month average suggesting less potential for insistent short covering.

After the downgrade of ratings of several Eurozone countries yesterday and the drop in Q4 2011 Eurozone GDP today, prudence will be the common theme today, leaving EUR/USD on the defensive and opening the door for a test of technical support around 1.3026.

So far today Sterling has fallen against the Euro and the USD following disappointing unemployment figures.

UK unemployment rose by nearly 50,000 to 2.67m with an overall rate of 8.4%.

Figures from the Office for National Statistics indicated that the average earnings rose by 2% until December which was unchanged.

These figures are well below the inflation rate and mean a continued squeeze on consumer spending power.

Greece burns on austerity cut backs

Amid wide scale protests, the Greek Parliament finally passed further austerity measures needed to secure another tranche of funding from the EU and IMF. Greece burns on austerity cut backsNot surprisingly the euro rallied overnight in the Asian session and is holding onto gains in early trading this morning.

Dissenters within the pro government parties were ousted, the conservative New Democracy party expelled 21 of 83 deputies with the Socialist PASOK party throwing out another 20 of its 153.

A warning from the Prime Minster that Greece was approaching “Ground Zero” applied enough pressure to get the vote through quite comfortably in the end, but how long the Greek political system can hold up in such harsh conditions is unclear.

There is rising support within Greece, and if you believe reports from the Germans too, for a withdrawal from the euro completely.

Whether they are pushed by the Germans, leave on their own terms or by a combination of both, indefinite austerity imposed by outsiders will eventually become too much for the Greeks.

This vote may mark the half-time interval for the Greek saga, the real fireworks are yet to come.

The U.K. Economy will avoid a double dip recession according to the CBI, but only just.

John Cridland, Director General of the CBI, estimates growth to be 0.2% in the first quarter, keeping the UK economy out of technical recession.

An optimistic forecast in our opinion, but the CBI are very well respected in the market and positive news is thin on the ground at the moment.

The Bank of England inflation report is announced on Wednesday and is expected to show a sharp drop in inflation and mirroring the Bank’s forecast late last year.

Sterling is unmoved from Friday against the Euro and Dollar, the QE announcement was almost fully built into the price beforehand.

Greek deal finally done- we think

Politicians in Greece have at long last approved austerity cuts totalling €3.3 billion in order to secure a second bailout deal. Greek deal finally done- we thinkOfficial talks now focus on the particulars of the bail out package, specifically a cut in Greece’s debt to GDP ratio to120%.

Nevertheless, the fact European Finance Ministers have suspended additional funds for Greece with the expectation that measures will be implemented, suggests there is the prospect for further uncertainty.

A Greek government vote is set to begin over the next couple of days, may see some advancement but investors will trade carefully ahead of the vote.

EUR/USD rallied to a high of around 1.3322 but failed to break above its 100 day moving average at 1.3332 following the contract.

As expected the ECB offered no help to the EUR, with market interest continuing to centre on the second 3-year LTRO on 29 February.

As the Euro continues to face against a backdrop of issues any upside for EUR could be limited in the short term. In any case the currency was already pricing in a lot of good news. EUR/USD will face major resistance around 1.3388.

Remarkably, risk measures are moving higher once again, providing some pressure on risk assets in the near term.

Markets today will digest the expected injection of £50 billion in quantitative easing from the Bank of England.

Wise Money still eyes greek outcome

The wise money thinks the Greek government are finally close to a deal with private and official sectors judging by the late afternoon surge in the euro yesterday. Wise Money still eyes greek outcomeThe Euro-Dollar pushed back above 1.32 driving Sterling –Euro back through 1.20 and cable above 1.59.

Whether this turns out to be the good news that the market is currently expecting, or another short term rally followed by a painful pull back remains to be seen, but there is reason to remain sceptical given the number of times over the last two years news about a Greek rescue deal moved the market in exactly the same way; Euro positive on the rumour, retracement on the fact.

The deal was supposed to be done and dusted by yesterday night, but yet another delay blamed this time on the late arrival of the official documentation means we are still waiting for official confirmation.

Putting geopolitics aside for a second, we have the rather important central bank meetings tomorrow in the UK and Euro-zone.

It’s unlikely that ECB President Mario Draghi will be drawn to comment in any detail on the Greek deal, and with no change to interest rates expected the European leg of the meetings should spring few surprises.

The Bank of England are expected to inject another £50bn via gilt purchases into the UK economy. It would come as a great shock to the markets if they did not commit to further easing given how dovish recent minutes and communication from MPC members has been.