Articles from June 2012

Money markets look for directions from euro summit

Hopes are fading that the EU leader’s summit this weekend will produce any directions for the money markets to digest on Monday morning. Money markets look for directions from euro summitThe current impasse between EU politicians is stemming from the order in which the EU moves towards political, fiscal and banking union (or not as the case may be).

The Germans are unwilling to consider a banking union without direct control of how bail out money is used by those banks in Spain, Italy or France that would require money.

That is, Germany would want political union before it committed to using the ESM/EFSF to recapitalise eurozone banks, which is the least likely of the three steps needed to be achieved on any reasonable timescale.

The southern states naturally feel the exact opposite is the way to go.

What we need at the very least is a roadmap of how we eventually get there.

But there is a real chance we may not even get that.

Spanish Bond yields continue to creep higher- this morning the 10 year bond is trading fractionally below the 7% level, sitting at 6.99%.

Nothing more is needed other than the word ‘unsustainable’ to describe Spanish borrowing costs at the moment- making the decisions made this weekend all the more important.

Low expectations for EU summit by weary money markets

The money markets are still heavily focused upon Europe as we move closer to the EU summit commencing on Thursday.  Low expectations for EU summit by weary money marketsThe euro is still looking soft as concern rises that EU leaders will once again fail to make any significant progress at the summit.

The two day EU summit in Brussels is the first meeting of European leaders since the Greek parliamentary elections on June 17 and there is mounting pressure upon Germany to take decisive action on the crisis.

There has been more bad news for Europe as Moody’s downgraded 28 Spanish banks due to the sovereign debt crisis and real estate losses.

Today we see important bond auctions from Italy and Spain to further direct the movements in the euro.

Today we have the Bank of England Governor Mervyn King and colleagues speaking at the Treasury select committee; the Pound seems to be slightly bullish this morning which is always surprising ahead of Mervyn King speaking.

Data just out from the UK has highlighted that May public sector net borrowing was sharply higher at £15.58 billion and notably above the expected £14.25 billion- however the Pound is unmoved by the data.

The Pound is likely to be benefitting from the perceived negativity on the EU summit with flows moving into the pound and the USD.

Later today we have US consumer confidence for June which will give further clues to the health of the US economy, however the main attention will be set on the EU summit and any feelers on expectations for Europe.

Money markets have little relief to look forward to

As the money markets continue to digest increasingly poor data snaps out of the world’s two largest economies and the lack of clear cut stimulus we look forward to another volatile week. Money markets have little relief to look forward toMarkets will be focused on the EU summit due to start on Thursday with expected topics on the agenda to include steps towards cross-border banking and a European fiscal integration pact.

Eurobonds will be on the agenda with Germany likely to battle against the idea, until there is a greater fiscal union.

The summit will undoubtedly provide an opportunity for Greece to request a loosening of its bailout conditions for the €130 billion loan from its troika of lenders.

Although with both the new Greek prime minister and finance minister being absent this has been left to the new foreign minister and outgoing finance minister.

The Troika have also cancelled their first trip to Greece, which was meant to take place today as the new Greek Prime Minister and Finance Prime minister recover from their ailments.

Last Friday a growth package was agreed between Germany, Italy, France and Spain which is a refreshing stance against austerity measures.

It was also thought that Spain unofficially requested a bailout for its debt ridden banks, although no such request has been reported, keeping Spanish bond yields at dangerously high levels.

We have a busy week in terms of data hitting the wire starting with German inflation figures on Wednesday expected to show a slight decline with US Durable Goods figures expected to show an increase in activity.

We also have UK and US GDP figures on Thursday which are likely to create a volatile market with further declines predicted from both sides of the Atlantic.

Moody’s downgrades Big Global Banks

In a widely expected move, fifteen global banks were downgraded by the ratings agency Moody’s yesterday evening. Moody's downgrades Big Global BanksBritish banks Barclays, HSBC and RBS saw their credit rating cut by two notches and one notch respectively.

All are likely to respond with reports today defending their credit worthiness in light of the announcement by Moody’s, undoubtedly citing that the reports are backward looking and do not fully reflect current market conditions.

They may have a point as well.

The markets have opened in risk-off mode responding to the downgrades, with equity markets down and the US Dollar regaining ground against Sterling and the Euro.

With the crucial EU summit due at the end of the month and today’s meeting between Germany, France, Italy and Spain also critical, the IMF has used this week to lay out its blueprint of how to save the eurozone.

Much to Germany’s ire, the IMF is pushing for common debt, a European wide deposit guarantee scheme and most crucially in the current climate sovereign bond purchases by the ECB.

Angela Merkel will fight to oppose almost all the measures, but it is getting to the point where only firm and decisive action to place the eurozone on a path towards the IMF reforms is enough to stop the crisis from finally getting to big for politicians to act.

Around the markets today the key data release is the IFO business climate survey which is likely to follow the economic survey from earlier in the week by registering a steep decline.

Wise Money hopes that you have a great weekend.

FED extends it’s Twist but holds fire on QE

As per yesterday’s FOMC meeting, the US economy has prompted the Federal reserve to continue its ‘operation twist’, their stimulus programme of buying longer term bonds and replacing the short term purchases until the end of the year. FED extends it's Twist" but holds fire on QEThis has come amidst a slowing employment and a fragile recovery of the US economy and coupled with an overall global slowdown emanating from Europe.

Money markets have not reacted very well to this measure, as they were expecting the Fed to come out with a more aggressive approach.

On the other hand, some saw it as a good sign that the US does not need to pull out all of its resources now and there remains ammunition for future action if deemed necessary.

Data expected from the US today are the unemployment figures, with initial jobless claims expected to be 380k as opposed to the previous figure of 386k.

Meanwhile, with attention keenly focussed on the US and the Eurozone grappling with its problems, the Pound has done reasonably well, being quite consistent and range bound between 1.5670-1.5750.

Despite falling inflation and growing concerns over the eurozone crisis, the MPC voted to keep rates on hold by a margin of 5-4, a close call, indicating that the MPC has moved closer to a fresh round of QE.

Retail sales out today in the UK are expected at 1.2% MoM and 2.0% YoY, which could see a lift in the Pound.

Back to the eurozone- and with the new Greece coalition in force, the PM Antonis Samaras is keen to deal with the bailout terms as they move ahead.

Further data expected today from Europe are the Spanish bond auctions and the French BTAN auctions.

ECB policy makers have backed the Eurozone’s bailout fund to buy the Spanish and Italian bonds which should help appease the markets in the short term as we await further clarity on Europe before or at the EU summit at the end of June.

US twists again?

The focus for today is on the US’s FOMC meeting later tonight and the question is whether will they or won’t “twist again” or expand their Quantitative Easing programme.  US twists again?A survey of 64 economists by Bloomberg showed that 37 out of 64 expect the Fed to announce an extension of Operation Twist tonight compared to 19 who think not.

If the Fed do go down the road of more QE or “Twist 2” then expect a bounce into risk appetite with Gold and commodities the big winners and gains in the Canadian Dollar and the Australian Dollar expected- and on the flipside expect a weaker US Dollar.

Back to Europe and Greece’s pro-European parties are said to be on their final stretch in forming a coalition government as EU and IMF officials were expected to visit Athens for talks on resuming payment of the country’s bail out funding.

Greece urgently needs €1 billion that was held back from a €5.2 billion payment in May, amid EU anger at the inconclusive first election on May 6.

That cash is expected to be paid before the end of June when the new coalition government is in place.

At the G20 summit there was clear evidence of a desire to move to closer integration to forge a sustainable Europe, a statement noted that “The adoption of the Fiscal Compact and its on-going implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs”.

Italian PM Monti added that euro heads are to make crisis decisions in the next 10 days and so the market is expecting progress by or at the EU summit at the end of the month.

Yesterday inflation fell again in the UK with UK May CPI coming in at -0.1% month on month, good news for the Bank of England as this aligns with their forecasts and potentially provides more scope for further QE in the UK.

Later today we have the MPC minutes and unemployment data from the UK to look forward to and interest will focus on any move towards QE evident from the minutes of the last meeting, if so we could see a dip in the Pound.

Greek election boosts the wise money markets

Global money markets and the euro rose initially on the back of the Greek election result which Greece’s pro-bailout party New democracy winning a closely fought election battle with Syriza the anti-austerity party finishing a close second. Greek election boosts the wise money marketsThe agenda will be now for New Democracy to form a coalition with Pasok- together they would secure enough seats to form a majority coalition and talks are expected to start today.

The outcome is very good for the markets and the euro and equities have pushed higher on the news as short positions are cut and optimism rises, the US Dollar has slid as investors increase appetite for risk.

Today and for the rest of this week we will see the Greek election result digested and it looks like for now at least an imminent Greek exit from the euro has been avoided.

Europe and Greece still faces many challenges ahead and the spotlight will focus upon the G20 in Mexico to see if any further decisive action on Europe will be forthcoming.

World leaders are set to boost the $430 billion IMF fund being used as a firewall for struggling European economies.

The weak fundamentals of Greece, Spain and Italy need urgently addressing and traders will be looking for more from world leaders in spite of the progress with the Greek election.

EU mid market company insight by GE

Mid-market companies– that is companies that are too big to be considered SMEs, but smaller than big, exchange listed businesses – play a key role in the UK and in the other top European economies.

Across the UK, Germany, France and Italy (the EU-4), the mid-market represents a small number of companies (ranging from a low of 1.2% in Germany to 1.7% in France) and yet it generates about one third of private sector revenue and employs about a third of each country’s workforce.

As Europe’s leading economies continue to search for their own path to growth, much of the debate has focused on the role that big businesses will play in the economic recovery.

These answers, however, have not been forthcoming and policy makers and commentators have also looked closely at the role played by start-up businesses, entrepreneurs and “SMEs” – small and medium sized enterprises. The debate has raged and theories have been offered but answers remain elusive.

So where might the solution come from? Perhaps they are to come from somewhere in between?

The purpose of this report is to examine the role played by midmarket companies – too big to be considered traditional SMEs, but smaller than those big, exchange listed businesses that dominate the headlines.

What this report shows is that if Europe wants to find a path to growth then those looking for answers need to focus more on this group of middle-market companies that are, in fact, continuing to grow, even in the toughest of times. Led by the industrious German Mittelstand, but supplemented by the resilient and determined mid market cohorts in each of Europe’s largest economies, the mid-market benefits from the global potential and scale of larger companies combined with the flexibility and drive of smaller ones.

It is a sweet spot for innovation and sustainable employment and, such is its scale, if this relatively small group of mid-market firms was able to grow headcount at just 2% a year (representing 650,000 jobs) between now and 2015, that alone would be enough to push EU-4 unemployment levels back to those last seen in 2007.

Across France, Germany, Italy and the UK (referred to as the EU-4 for the purpose of this report), the mid-market represents a tiny fraction of total companies – ranging from a low of 1.2% in Germany to 1.7% in France – but generates about one third of private sector revenue and employs about a third of each country’s workforce.

Each mid-market, identified by the structural demography of its domestic economy, varies slightly from country to country. A middle market company in Germany tends to be larger than one in Italy, for example. But based on 2010 revenue and number of employees, we identified about 140,000 firms in the EU-4, which are unique in both their structure and economic contribution from either small or large companies and which should be considered
a part of the mid-market. These firms are responsible for 32 million jobs and generate €53 million in revenue1.

Combined, the middle market in the four European countries contributes €1.11 trillion ($1.48 trillion) to the EU-4 GDP2.

This makes the middle market in the EU-4 one of the top 10 economies in the world, ahead of India and Russia3.

King and Osborne pump funds to grow UK economy

It was announced last night at the Annual Mansion House dinner that the Bank of England will provide a double response package to tackle the deteriorating economic outlook.King and Osborne pump funds to grow UK economy

Coupled with the government it will pump billions of credit to banks who in turn will lend to companies.

Alongside the cheap credit, banks will also have access to short term loan deals during times of “exceptional market stresses” according to George Osborne.

Sir Mervyn King also acknowledged that the European debt crisis had increased funding costs for the UK banking sector, leading to a rise in borrowing costs for corporates and individuals.

“The eurozone crisis has created a black cloud of uncertainty hanging over our economy with paralysing effect.”

Sterling has not reacted well to the news dropping to below 1.23 against the single European currency at 1.2282 and 1.5513 against cable from coming off a high if 1.5557 earlier.

We are expecting a volatile few days with the Greece election which is effectively a euro referendum on Sunday will ensure a busy start to trading which re-open late Sunday night (BST).

This news against bubbling Spanish bond prices hitting over the 7% mark has made forecasting for the Euro even more tricky…one to watch over the next few days.

It’s been a bad few weeks for the Dutch football team and also now for their banks- with the rating agency Moody’s downgrading the long terms credit ratings of ING, Rabobank and ABN Amro. “Holland’s banks will face difficult operating conditions throughout 2012 and possibly beyond” according to Moody’s.

This news follows similar cuts made to Italian and Spanish lenders in the past few weeks.

Greek election on Sunday is the focus of attention

The Greek election over the weekend looms large over the money markets. Greek election on Sunday is the focus of attentionThere is a genuine feeling of unease over what will happen to Greece over the coming months.

But as ever with the money markets, uncertainty over the outcome is the main driver rather than the prospect of a Greek exit from the eurozone.

The water was muddied further by an article in the FT by Alexis Tsipras, leader of the Syriza Party, suggesting he would keep Greece in the eurozone if elected.

A month ago the dominant thought was that if an anti-austerity party formed a government, Greece would then start along the road to leaving the euro.

However, it is possible that Greece could remain inside the eurozone even if they were to default.

Whatever happens on Sunday, next week will likely be an interesting one.

Across the major pairs the euro has gaining ground in Asian trading overnight as details leaked (what a surprise….) that European leaders are prepared to discuss a European banking union at the next EU summit.

It strikes us as yet another game of chicken between EU politicians and the money markets.

Let’s hope they can actually deliver what is needed this time, rather than just proposing something and then thinking it wouldn’t matter if they yet again fail to deliver.

The Swiss Central Bank held interest rates this morning and also reaffirmed it will defend the 1.20 level against the euro.

If Greece were to leave the SNB’s resolve would be tested to the max as people dumped euros and piled into the Swiss Franc. Although the SNB suggest that they will buy euros in unlimited quantities, would that work in practise?