Articles from March 2012

New eurozone firewall too small for purpose

Europe’s 17 eurozonegovernments have agreed to deliver €500 billion in a new bailout funds today in the hope of erecting a firewall big enough to contain the sovereign debt crisis and encourage the International Monetary Fund members to commit a similar sum to emergency reserves.New eurozone firewall too small for purposeBut the eurozone finance ministers, meeting in Copenhagen amid calls to erect the “mother of all firewalls”, ditched explicit earlier proposals to keep a further €240 billion (£200billion) in reserve for the next two years.

The deal conformed to German prescriptions for a minimalist bailout fund, a recipe that the European commission in advance described as inadequate to the challenges confronting the euro.

Ministers nevertheless endeavoured to impress the bond markets, the Americans, and the Chinese, trumpeting the agreement as worth “more than a trillion dollars” in the hope that this will press the big IMF donors into doubling the monetary fund’s reserves to a similar figure next month.

“We are now in a strong position for discussion on the IMF in April. It is a good signal,” said the French finance minister, Francois Baroin.

“All together the euro area is mobilising an overall firewall of approximately €800 bn, more than $1tn,” said a Eurogroup statement.

But that figure included €100 billion in bilateral loans to Greece from EU countries in 2010 as well as €200 billion to Ireland, Portugal and Greece from the temporary eurozone bailout fund which closes next year, although those three programmes will run their course until 2015.

The Copenhagen meeting degenerated into acrimony and some chaos when the Austrian finance minister, Maria Fekter, upstaged the eurozone leaders by first announcing an €800 billion firewall.

Jena-Claude Juncker, the veteran Luxembourg prime minister who has been chairing the eurogroup for eight years and whose term expires in June, threw a hissy fit and cancelled a media conference at which he was to unveil the decisions.

The new money comes in the form of the European Stability Mechanism (ESM), the permanent eurozone bailout kitty and embryonic European Monetary Fund which starts in July. The ESM’s launch has already been brought forward and ministers on Friday also agreed to speed up the process of paid-in capital to get the fund fully operational within two years.

Its lending capacity was capped at €500 billion, as has long been planned.

A draft statement yesterday said that the spare €240 billion would be held in reserve for emergency use, but was dropped today.

The permanent fund’s lending capacity hinges on €80 billion being paid in five instalments till 2014 in order to retain a triple-A credit rating, meaning that it could be two years before the fund is operating fully as foreseen.

But the parallel running of the current temporary and the future permanent funds will ensure a lending capacity of €500 billion, the ministers said.

UK output falls worse than feared

As Wise Money blogged yesterday the official figures from the Office for National statistics indicated that the UK economy fell more quickly towards the end of last year than initially thought. UK output falls worse than fearedGDP fell by 0.3% in Q4 last year as opposed to the 0.2% reported. This fall shows a change from the 0.6% in the previous quarter and takes the overall growth figure to 0.7% down from 0.8% estimation.

One of the main drivers behind this fall is the 0.7% drop in manufacturing followed by 0.2% construction and services at 0.1%.

So far today Nationwide have revealed that house prices were pushed lower than a year ago for the first time in six months following a 1% fall in March.

Nationwide are attributing the slow down to changed in the stamp duty rules causing a “headwind” in an already difficult environment.

Since the budget first time buyers must now pay 1% on properties worth more than £125,000 following a two year holiday and there’s a new super stamp duty for properties sold over £2 million where a 7% payment is now due.

The figures were based on Nationwide mortgage data and indicated falls in all but three regions which were London, North England and Scotland.

The combination of these stories has put Sterling under pressure so far this morning with cable dropping off from the mid 1.59s yesterday to 1.5891 at present but up slightly against the Euro at 1.1971.

With the relative calm in the markets investors are becoming increasingly comfortable with the lack of movement in currencies.

This in line with the fall in risk aversion as market concerns over US growth and Eurozone debt problems retreat.

In the short term there is little catalyst to shake markets out of their trance and we could see euro/US Dollar continue to drift higher.

Certainly, firmer risk appetite, is a positive driver for the euro while the pull back in US bond yields has restricted the Greenback.

Revised UK GDP data weaker than expected

The UK’s Q4 final GDP has come in at -0.3% which is lower than the expected -0.2% and is a disappointing number for the Pound which has faded lower this morning against the euro and the US Dollar.  Revised UK GDP data weaker than expectedThe number is not a great surprise but more of a disappointment and will heap pressure on the Q1 2012 GDP to come.

The US Dollar remains somewhat on the back foot following Fed chairman Ben Bernanke’s dovish tone earlier in the week with rhetoric suggesting more QE could be required and the loose monetary policy stance is here to stay despite a sustained run of positive economic data.

The USD has managed to claw back a little overnight against the EUR and the GBP- this corresponds to a move out of risk on weaker Chinese data.

Elsewhere risk currencies such as the Australian Dollar have come under pressure overnight as further concerns of a slowdown in China have dampened demand for risk currencies.

February’s industrial sector profit fell 5.2% year to date, the markets will be closely watching the situation in China.

Essentially China and the US are the key drivers behind global growth and any signs of slowing growth will turn the markets into risk off mode benefitting the safe haven shores of the USD, JPY and CHF and weakening risk on commodity based currencies such as the AUD & South African Rand.

Bernanke moves the money markets

Yesterdays appealing comments by Fed Chairman Bernanke, in addition to better than expected results for German IFO business confidence last month, have boosted risk assets whilst weakening the Greenback against Sterling and the euro. Bernanke moves the money marketsMarkets appear to have shaken off, at least for now, growth worries stemming from weaker manufacturing confidence surveys in China and Europe last week.

The S&P 500 climbed 1.4% to 1,416.51, its highest close since May 2008.

The Dow Jones rose 1.2%, while the Nasdaq gained 1.8% to close at 3,122.57, its best finish since November 2000.

Ben Bernanke continued his stance that supportive monetary policy is still necessary particularly given worries about the jobs market and additional QE may still be needed.

Today markets will focus on US and French consumer confidence coupled with bill auctions in Spain and Italy. US consumer confidence is likely to slip slightly while the bill auctions are likely to be well received.

Sterling has failed to maintain gains above 1.59 against the Greenback over recent weeks let alone manage to test the key psychologically level of 1.60.

Therefore the current move above 1.59 could be a short one.

For the break above it will require an improved downtrend in the Greenback motivated by a sharp enhancement in risk appetite and/or a drop in US bond yields for Sterling to move much higher.

Both are unlikely.

Sterling will be susceptible to a general stronger Dollar for the rest of this year but could outperform against the euro.

Euro weakens on new greek debt rumours

The euro suffered again overnight as reports in various papers talking up the possibility of Greece badly missing their deficit targets. Euro weakens on new greek debt rumoursThe news has caused another shift out of the euro as investors have looked for safer places to invest their funds.

The articles, if proven true, will add yet more pressure onto the rest of Europe with major doubts already surrounding the success of the latest bailout for Greece worsening.

However, unlike when Greece was still seeking this bailout, the US Dollar hasn’t been the sole beneficiary.

Sterling has held its own against the Greenback by slipping back only 1 cent compared to the 3 cents it lost last time.

This is partly due to improved sentiment which was kick-started by the US with strong data realises from their jobs sector.

The UK announced its latest employment figures today with the unemployment rate remaining at 8.4%, a set of results which weren’t too bad.

Apart from this, it is another data light day with little of note being released. We can expect the US Dollar to remain strong as fears being to grow about Greece’s latest bailout.

Wise money markets becalmed in post greek seas

Following an indifferent Asia trading session overnight where Japan kept interest rates at 0.1%, the market now awaits key data from the Europe and the US to drive sentiment for the rest of the week.Wise money markets becalmed in post greek seasThe Greek debt swap deal has certainly added to this lack of direction providing little motivation to the markets yesterday.

The deal that amounted to a swap of £149 billion worth of bonds for a mix of new instruments ranging in maturity from 11 to 30 years had a relatively low uptake leading to bond yields from 14-19 %, the highest in Europe.

It appears the market is sceptical about this latest attempt by the Greeks to fend off their inevitable default and thus is looking for higher yields over shorter periods.

The euro continues its resilience at currently trades at 1.3142 against the Dollar.

Elsewhere in Europe today we have the German ZEW survey where we get an insight into medium term forecasts about Germany’s finances.

Over to the US and the Greenback should not be concerned by tonight’s FOMC meeting.

We may see the Dollar rally if Fed Chairman Bernanke is slightly more positive in his statement with further support from increasing theories that the Fed will begin on some form of sterilised QE shortly.

This coupled with expected stronger retail sales and positive National Federation of Independent Business (NFIB) report of small business bodes well for the US recovery and for President Obama in an election year.

Finally the UK Job market may be “turning the corner” according to a survey completed by recruitment firm Manpower.

The news comes ahead of the latest data tomorrow which are expected to show a further rise in unemployment.

Positive sentiment can now be found around the country in the East Midlands, North West and particularly London due to the Olympics.

Today Sterling is slightly firmer against the Euro and the Dollar trading at 1.1917 and 1.5667 respectively.

US employment figures light up wise money markets

Another expectation beating employment report from the US on Friday has the markets in buoyant mood this morning. US employment figures light up wise money marketsThe headline number was 227K jobs created in February against a forecast of 210K, with strong upward revisions to both December and January numbers.

This marks the third straight month of strong jobs growth with gains spread across different sectors of the economy.

One negative was that construction jobs showed flat growth for the first time in a couple of months.

Interestingly we have again seen the Dollar strengthen on the back of positive US developments, which flies in the face of the risk-on, risk-off paradigm that has dominated FX trading in the US Dollar over the last few years.

Commodity currencies initially surged on the news but have cooled off as we start the week.

Looking ahead this week we have several big ticket releases to look forward to.

Tomorrow German economic sentiment is followed by US advanced retail sales and the Fed interest rate decision.

The market expects a strong increase in retail sales from last month and Friday’s employment report is fuelling further optimism of a stellar number.

The risk therefore is to the downside in terms of the Dollar if we get a disappointing figure.

The FED meeting should be a non-event, but talk about sterilized QE over recent days by the Fed Chairman will keep market interest high.

Also worth watching is the Swiss Interest rate decision, not for interest rates directly but for chatter over an increase in the Swiss Franc peg which, if undertaken, would cause significant movements across the FX markets.

Deadline Day for Greece bond holders

EU officials are desperately trying to convince private holders of Greek bonds to accept a crucial debt swap deal ahead of today’s deadline. Deadline Day for Greece bond holdersIn order for Greece to receive a second bailout it will need at least two thirds of bondholders to take a 53.5% cut in the value of their holdings and the deal is considered essential in Greece’s attempt to avoid a default.

According to the Institute of Finance yesterday just under 40% of the bond holders had agreed to the new deal leading to a nervy countdown at 8pm GMT deadline later today.

If the total number of bond holders reach the required 66% (approx €150bn) agree to the swap, the government can force the other bond holders to take the haircut too.

Remarkably the euro remains relatively resilient in the face a Greek default up slightly against the Greenback reaching 1.3217.

Back to the UK and Quantitative Easing has knocked £90 billion off pension funds according to National Association of Pension Funds (NAPF).

The news came from two recent studies and blamed lower bond yields and consequently pushing final salary pensions further into the red.

Joanne Segars, Head of the NAPF, said: “Businesses running final-salary pensions are being clouted by QE.  Deficits that were already big now look even bigger because of its artificial distortions.

“Firms are legally obliged to fill the deficits, and that diverts money away from jobs and investment, and will lead to further closures of final salary pensions in the private sector,” she explained.

Finally, today we have interest rate decisions in the UK and Europe both expecting no change and consequently little FX impact.

Reduced revisions to ECB growth forecasts will however, could underpin a more negative tone in this afternoons press conference.

Greece threaten bond holders with default option

Greek Politicians are applying increasing amounts of pressure to bond holders in a last ditch attempt to obtain the necessary 75 per cent to agree to the terms of the looming bond swap tomorrow.  Greece threaten bond holders with default optionThe Hellenic Republic is threatening to invoke Collective Action Clauses (CACs), agreed by Greek politicians last month, to force through the deal which if used would almost certainly constitute the first sovereign default in Eurozone history.

Any default would trigger credit default swaps on the bonds, a type of insurance that could lead to be very lucrative to those investors refusing to participate in the deal but might also lead to renewed uncertainty in the market.

CDS contracts are traded over the counter and are fairly opaque in nature and it is unclear exactly how many contracts might be triggered and who might be on the other (losing) side of the bet.

The uncertainty is naturally translating into risk-off, with equity markets declining along with the Risk-on currencies such as the euro and Sterling.

The US is once again the big winner, rising across the board over the last few days on a run that can be expected to continue until full details of the bond swap are announced.

It is fortunate given the levels of volatility in the market that both the ECB and Bank of England are unlikely to make any changes to monetary policy at their respective meetings this week.

In Europe interest rates will stay at 1%.  Mario Draghi will hopefully talk in detail about the success of the LTRO but is unlikely to be drawn to talk about Greece, much to the markets disappointment.

The Bank of England is also likely to keep monetary policy on hold; another boost to the asset purchase scheme would be seen as the Bank panicking and would probably do more harm that good at this stage.

Greek investors ponder how much money to lose on debt burden

Greece has a potentially difficult week ahead as a group of private investors consider the terms and conditions of an arrangement that’s intend to cut €107 billion from the Greek’s €340 billion debt burden.Greek investors ponder how much money to lose on debt burdenThe whole deal hinges on whether the creditors are willing to take a hit of 75% on their holdings in return for a combination of long term Greek bonds and debt issued from the bailout fund.

Due to terms of the second bailout if over a third of the bond holders reject the deal the overall bailout could collapse as per terms put through Government last week.

The reaction from the rest of Europe specifically Austria is now sceptical about the overall viability of the package.

Chancellor Werner Faymann said yesterday that the second bailout is not the end of the matter.

“I would not trust anyone who says that for Greece is enough,” Faymann told Austrian media.

“For Greece it depends on whether they can stick to these measures over several elections.”

Greece will begin voting at the end of this month with a general election in the offing.

In the interim, Greek officials are required to gain the backing of a minimum of 2/3 of its private holders by Friday to employ the debt swap and comply with the requirement terms of its second bailout.

Worst case scenario Greece could run out of funds in less than a fortnight and could prompt an unruly and possibly catastrophic default.

As you would expect the news is weighing heavily on the euro right now and has seen EUR/USD slip to 1.3191 from 1.3440 at the same point last week and Sterling is approaching the key psychological figure of 1.20 at 1.1981 against the single European currency.

Money markets will keep a close eye on developments in the med and this will provide the impetus for sentiment this week.

Elsewhere the week is largely dominated by Central Bank interest rate decisions with announcements in Australia, New Zealand UK, Europe and Canada all expecting no change in the overall rate.

Any variance from these expected figures, with any turbulence from Greece and Friday afternoons US Non-farm payroll data could lead to a volatile week for the markets.