Articles from July 2012

UK holds on to it’s AAA credit rating

The UK will maintain its top AAA credit rating, according to the rating agency Standard & Poor’s (S&P). UK holds on to it's AAA credit ratingThey expect a strong second half to the UK economy this year in spite of a slip into recession earlier in 2012.

That rating suggests a stable outlook and S&P said it likely the government would keep budgets tight.

The Chancellor George Osborne welcomed the decision stating the world was confident that Britain was dealing with its debt.

The IMF said last week that the UK should reduce its budget cuts if growth did not improve.

Their annual dossier on the UK suggested that tax rises and spending cuts introduced since the spring of 2010 had slashed growth by 2.5% over the last two years.

Official figures published have shown that Spain’s economy contracted by 0.4% in the last three months, which follows a 0.3% fall in the previous quarter.

This follows the disappointing bond auction last week in which borrowing costs reached 7.5% on fears that Spain will struggle to repay its debts.

EU officials are now requesting the ECB helps to Spain to reduce these costs.

“We will work in close agreement with the ECB, and we will, as ECB President Mario Draghi said, see results,” Mr Juncker told German and French press.

“I don’t want to drive expectations, but I must say, we have reached a decisive phase.”

Meanwhile, the BoE appears to be edging towards further easing too, but rather than more QE a rate cut is looking like the preferred option.

Eurozone keeps us all fascinated

There is never a dull moment in the eurozone and this week was no different with Moody’s negative outlook for Germany, Netherlands and Luxembourg. Eurozone keeps us all fascinatedAlso countless Spanish regions approaching the struggling state for a bailout to Spanish yields hitting a dangerous level of 7.74%.

This was quelled though when Mario Draghi hit the news wires and sent the markets into a buying frenzy.

The euro will be saved, this was the strong message that ECB president sent to the markets yesterday with the clearest sign yet that the ECB will, once again, step into action and aid faltering economies across the eurozone.

This could see the continue the sovereign bond buying scheme, that helped to ease markets in the first quarter of 2012.

This is the clearest sign yet that the bank are recognizing the scale of the problems they are facing and looking for steps to address the issue, even if they are more short term steps.

This helped shore up the euro with EUR/USD rallying to touch a weekly high of 1.2316 from the low of 1.2041 and also eased the pressure on Spanish and Italian bond yields.

This also caused GBP/USD to move 2 cents in a positive direction to hit a high of over 1.57 as markets are searching for higher yielding assets away from the safe haven dollar.

The USA was doing their part to help the market rallies yesterday with Durable goods orders coming in at 1.6% better then median forecasts of 0.4% and jobless claims 353k better then 380k expected.

UK economy shrinks faster than feared

Starting with the dire UK GDP numbers yesterday- the UK economy shrank by 0.7 per cent between April and June, meaning the UK is now in the worst double dip recession in 50 years. UK economy shrinks faster than fearedAccording to the ONS UK economy is now 0.3 per cent smaller than when the coalition came to power.

But given the severity of the news, Sterling barely reacted.

It dropped around 50 pips or so against the Dollar and Euro, but regained ground throughout yesterday afternoon.

Currencies are usually one of the first things to react to news like this, and the lack of movement in Sterling suggests either this was expected by the market, which I don’t think it was, or that the data does not fully reflect the economic picture in the UK.

Remember, this number is only preliminary, and is prove to revisions which are on average 0.2%.

We also had the Queens Jubilee with extra bank holidays and the wettest June on record, hitting the high street especially hard.

Add in a lot of wet weather and a holiday should not be used as an excuse, the UK economy is still suffering badly but I am with the market here, this is not as bad as it first seems.

Unfortunately the situation in Spain is getting worse by the day.

A report out yesterday suggested the Spanish Government may need to ask for a bail-out as soon as this weekend.

What is clear is that at current yields, the Spanish are very close to losing market access.

The ECB needs to act and avoid a full sovereign rescue.

The current debate about granting the ESM a banking licence to do exactly that may take to long.

UK’s Q2 GDP economic recession deepens

Global equities closed lower for the third day in a row, as fears over the European economy surfaced yet again, with Spanish bond yields pushed to its all time highest level of 7.63% yesterday, getting closer to the need for a bailout.  UK's Q2 GDP economic recession deepensThe Pound has managed to surge against the euro, as the crisis deepens, but the health of the economy is still far from steady.

UK GDP for Q2 has just been released and has exceeded the most dire forecasts coming in at a whopping -0.7% quarter on quarter.

The year on year forecast is now -0.8% which mirrors the recent projections from the IMF.

Expect the US dollar to continue to get stronger against the pound as the markets price in the woes the UK faces, as it fails to distance itself from the Eurozone.

The turmoil in the markets was further fuelled by European officials citing that Greece was going to miss its targets for debt reduction; Moody’s also reduced the outlook for Germany to negative, with fears that the ECB and IMF may have lost most of the money already injected into Spain.

With most of these headlines capturing the news, it overshadowed the surging Italian yields which also moved up, though not to alarming levels; however markets fear that they may be taking the same route as Spain.

The euro continued to weaken against the dollar, and unless we see some action taken by the ECB and the IMF, it looks set to push lower towards the psychological 1.20 level; if we break this we could see a further slide.

The US economy is not in the greatest shape as well, as factory orders came out yesterday, worse than expected. Though growth is only marginal and almost non-existent, a higher than expected unemployment figure and with the austerity measures set to kick in soon, there are further speculations that there may be another round of quantitative easing by the Federal Reserve, even though Fed chairman Ben Bernanke insists he will not implement QE unless absolutely necessary.

The pain in Spain heated by rising interest rates

Negative sentiment once again is emanating from Europe, reflected by Spanish yields reaching new highs and this carried over into US equities with the S&P500 ending down by 0.9%. The pain in Spain heated by rising interest ratesIn Asia stock indices are trading in negative territory this morning with the Nikkei down by 0.2%.

In the money marketss the euro US Dollar is under pressure and trading just above 1.21.

The nerves were jangled by credit ratings agency Moody’s warning that the outlook for Germany’s AAA credit rating is negative, the first step towards a possible downgrade.

Moody’s said that the country was at risk from the increased likelihood of a Greek exit from the euro and the need to provide more support to Spain.

But the major concern was Spain which saw its borrowing cost rising above 7.5% which is grossly unsustainable.

The German finance minister is to meet the Spanish economy minister in Berlin as the pressure ramps up.

In addition today representatives from the troika of international lenders arrive in Greece to assess its programme on reducing its debts with the view to allow the last tranche of the aid package agreed in March.

Therefore today will be centred upon news from Europe and notably Spain and their cost of borrowing.

Euro snatches defeat from the jaws of victory

It would appear there has been little breathing space for European markets after the latest concerns for Spain and Greece. Euro snatches defeat from the jaws of victoryFor Spain the approval of a bank bailout has provided little support as speculation of a sovereign bailout intensifies.

Worryingly the fact that two Spanish regions have requested government aid with more potentially sitting in the wings has only acted to cement these concerns.

Over to Greece and the delay on a bailout tranche due to a failure to meet austerity targets the European Central Bank (ECB) decision not to accept Greek debt as collateral and the visit of the Troika (EC, ECB. IMF) will keep markets nervous as default fears increase.

This has certainly been reflected in the bond market with peripheral bond yields coming under increasing pressure whilst core eurozone yields have turned negative in some cases.

Spanish yields have moved above the significant 7% threshold while the euro has nose-dived versus the US Dollar and on the crosses it ever more takes on a funding currency role and makes its way towards the 1.20 level versus the Greenback.

It was a similar story against the Japanese yen which fell to 94.37 yen in Asian trade, its lowest level since November 2000.

It also dropped against the Australian and New Zealand currencies too.

Asian stock markets also fell overnight from fears that the on-going debt problems in eurozone will hurt the region’s growth.

Japan’s Nikkei 225 index fell 1.9%, South Korea’s Kospi dropped 1.8% and Australia’s ASX 200 index shed 1.7%.

As the eurozone is a key market for Asian exports and there are worries that demand from the area may decline in the near term.

At the same time, a weaker euro has also added to the woes of Asian exporters, as it makes their goods more expensive for buyers from the region.

Expectation of additional monetary stimulus, particularly in the US and China have offered some support to markets recently but this does not appear to be a long term solution so far.

Germany votes to support Spain

In Germany yesterday the lower house of parliament agreed to contribute to the estimated €100 billion pot to bail out ailing Spanish banks which are suffering from their domestic property crisis. Germany votes to support SpainThis was seen as a make or break decision for the bailout which is expected to be pushed through European parliament later today.

However the Germans have delayed their decision on whether the ESM will be able to recapitalise banks directly.

Yesterday we saw a choppy day for GB Pound/euro with the pair pushing through the 1.28 barrier for the first time since November 2008 as the Spanish bank crisis dampens investor appetite for the euro.

This led a run on Spanish bond yields as investors wanted greater payments to buy the ailing countries debt, which pushed them over the ‘critical’ 7% level again this month.

This is in contrast to Italy where credit ratings agency Fitch announced yesterday that it is keeping Italy’s rating at  –A which shows an increasingly different story to the two notch downgrade by Moody’s and one notch move by S&P.

The IMF noted that the UK should rethink its austerity first approach as it is dragging down UK growth which was cut by the fund from .8% this year to .2% with retail figures this week coming in weaker than expected affected by the wet weather.

However, it appears the UK is trying to move away from the EU being its primary trading partner with over 50% of exports going to countries outside of the EU with a focus on emerging economies such as Latin America.

GBP/USD has been rallying this week apparently off of the expectation that fresh new stimulus measures will be introduced out of America after Fed chairman Ben Bernanke did not rule out a third round of QE if the situation called for it.

GBP/EUR has been racing this week pushing to highs from November 2008 and going over the 1.28. EUR/USD has been dictating trade this week with large movements being attributed to the inter-day trading.

Wise money markets wait on Bunderstag votes

The Bunderstag is today expected to give the green light for Angela Merkel to push ahead with the bail out of the Spanish banks.Wise money markets wait on Bunderstag votesGerman participation in the bail out is a must and the markets remain nervous about the potential for a delay on the decision, ala the decision on the ESM by the German constitutional court.

However, it is likely that the vote will be passed as only a simple majority, rather than an absolute majority.

The euro is finding some strength as we build up to the announcement, but its path today is entirely down to the result of the vote.

Eurozone data today is confined to low level Italian industrial output.

UK retail sales are also due later today.

Modest gains are expected but the effects of the extreme wet weather will undoubtedly have a real drag on the numbers.

The monthly figure is expected at 0.4%, but something closer to 0% would not be a shock.

Sterling remains in a Euro-Dollar sandwich and is unable to find any traction on the back of UK related data or news flow.

Public sector finances figures are due tomorrow; the pressure is building on the Chancellor as the economy continues to slow.

The Prime Minister has reaffirmed the Government’s commitment to fiscal austerity this morning, but it is becoming increasingly clear that ultra-lose monetary policy by itself will not get us out of the mess we are in.

The Chinese authorities cut rates alongside the ECB and BOE earlier this month, so tomorrow’s business sentiment number will be watched closely as the Chinese economy slows.

FED Bernanke hints on further financial stimulus

The euro fell a cent against the US Dollar during UK trading yesterday but managed to reverse its losses following Ben Bernanke’s testimony to congress yesterday.  FED Bernanke hints on further financial stimulusInitially the market was disappointed as Bernanke refrained from mentioning further stimulus directly.

However the overriding sentiment was that the economy remains very weak and stimulus remains very much on the cards- the door is still open.

This sentiment helped the US Dollar to weaken off and confidence to pick up with the S&P closing up 0.7% after falling off 1.2%.

The EUR/USD also bounced just under a cent reversing the earlier dip; Asian currencies and the AUD also posted gains on the increased appetite for risk.

Yesterday we witnessed a significant fall in the value of the euro through UK trading as the markets turned nervous ahead of the German vote tomorrow on aid to recapitalize Spanish banks.

Angela Merkel is talking tough and has stated that she will get “the majority she needs” and she better hope so.

If she fails to get a majority we can expect to see a sharp fallout in confidence; the market is already nervous and does not see a majority as a foregone conclusion.

Spanish banks need as much as €100 billion euros and with confidence in the Spanish banking system at very low levels a smooth process of recapitalization is a must.

Kaiser Angela Merkel sparks euro rally

European stocks have surged and the euro has climbed up above the 1.22 level that it breached overnight, as the German Chancellor Angela Merkel re-affirmed her tough stance on measures towards solving the region’s debt crisis. Kaiser Angela Merkel sparks euro rallyEurozone inflation data was released on Monday night, though the consistent reading as per last months figures failed to move the markets with volatility and trading being thin.

There is also talk circulating that we could see a deposit rate cut by the ECB from its current level of 0.75%

The majority of action came in the American session with very poor US retail sales data yesterday raising speculation once again that the Federal Reserve will need to step in with easing measures to support the economy.

This morning the market for EUR/USD has been quite steady as investors await Bernanke’s Congressional testimony later today.

A quiet, slightly risk-off session during Asian hours on Monday saw the Pound soften moderately, moving lower from opening levels but has rallied yesterday against most currencies following Merkel’s re-affirmation of Germany’s tough stance in resolving the European debt crisis.

A decrease in the house price index kept some downward pressure on Sterling; however Dollar weakness ultimately emerged as the driving theme later in the day.

The IMF has slashed the UK growth forecast for the economy at 0.2% for this year, sharply lower than the 0.8% forecast earlier in April.