Articles from September 2012

Spanish budget leads the markets bounce

It was another volatile day yesterday with politicians and budgets leading the direction in the markets.Spanish budget leads the markets bounceThe main money market mover yesterday was Spain’s budget announcement for 2013, which was delayed until after European markets had closed and was the real pointer for how the struggling economy will increase revenues next year.

It is seen as more as spending cuts rather then increasing revenue through tax, with 8.9% being knocked off of ministerial budgets expected to reduce €40 billion off the deficit.

The French budget is expected to be the harshest for 30 years out later today with the much anticipated 75% tax rate expected to be sworn into the budget at a time when GDP is remaining stagnant on no growth.

We had UK GDP revised numbers out of the gates early with the UK showing resistance to the recession coming in at -0.4% rather then -0.5% and gave GB Pound an early rally against euro and US Dollar.

We also had mixed figures from the US with GDP getting a downward revision, 1.3% against 1.7%, mainly attributed to the $5.3bln revision in farm inventories from the worse drought in decades hitting the nation and durable goods sales which were worse then expected.

However jobless figures continued their steady decline which is a bonus for a president seeking re-election.

European economy back for weakness examination

Concerns about Europe’s debt crisis are growing and Spain is back for signs of economic weakenss with the price of Spanish 10 year bond yields rising to 6%. European economy back for weakness examinationIn addition there was also the announcement of a snap election in Catalonia and political demonstrations in Madrid and Athens adding to the tension.

A main focus for today will be on Spain as it presents its 2013 budget – will this pave the way for Spain to request official aid from the EFSF/ESM?

US equities fell for the fifth day in a row in a continued sign that the burst of confidence from QE3 is starting to wobble.

One point of optimism for the markets is speculation that China will embark on further stimulus to support economic growth and bolster equities.

This has lifted the negative tone somewhat and the main beneficiaries have been emerging market equities and currencies, however European stocks are also up on the rumour.

This morning the GB Pound/US Dollar is also higher before the final revision of Q2 GDP for the UK which is expected to confirm a -0.5% contraction.

Although this number is not pretty, there is renewed optimism that Q3 will show improvement as noted by Bank of England member Fisher who expects very strong UK GDP in the third quarter.

The money markets are a little mixed this morning caught in between risk on and risk off with negativity from Europe being hedged by optimism from China.

EUR/USD still remains below 1.30 and could come under further pressure unless we get some relief from Spain.

The big winners for today will be the commodity currencies such as the AUS Dollar & ZAR which should be bolstered further on the China rumours.

Greenback stands tall

The US Dollar has rallied so far this week despite expectations for weakness following the Fed’s announcement of QE3. Greenback stands tallIt virtually appears to be a case of sell on rumour, buy on fact.

Admittedly the US Dollar usually does weaken following QE with the USD index falling during the full periods of both QE1 and QE2 (-4.6% and -2.9%, respectively).

The contrasting argument in provision of a stronger US Dollar which appears to be supported by the massive decline in USD positioning over recent weeks and over 5% drop in the USD since 24 July is that the market has already priced in a lot of QE expectations into the currency.

Furthermore it will likely play positive for the Dollar the fact that the Fed is not alone in increasing its balance sheet.

Many central banks are striving to uphold very easy monetary policy.

The consequence of this is that there is a battle of the balance sheets in progress that does not necessarily involve the USD being the underdog.

The euro/ US Dollar currency exchange rate has dropped well off its recent highs around 1.3173, with emotion for the currency souring due to fumbling by the authorities in Spain on requesting a bailout and disparities over how to proceed on several issues including banking supervision.

The drop in the September German IFO business climate survey, the fifth in a row, did little to help the euro, with the survey adding to eurozone growth worries.

Gradually it looks as though single European currency short covering is running its course and while there may yet be a further bounce in the EUR should the ECB begin its bond purchase program, the near term outlook is more fragile.

Elsewhere five of the UK’s biggest lenders have signed up to the ‘funding for lending’ scheme which has been designed to encourage activity in the economy by making cheaper loans to firms and individuals.

German confidence dips and drags down euro

German IFO business confidence posted its fifth straight monthly decline yesterday, dragging the Euro lower against the US Dollar and Sterling. German confidence dips and drags down euroAlthough the German economy has remained out of recession, the IFO number suggests that there is a growing possibility that the eurozone powerhouse is starting to sag under the weight of supporting the struggling periphery.

Adding to European woes are budget problems In Portugal and surprise surprise- Greece.

The Portuguese are under pressure to increase tax levels and announced increased social security contributions.

The move sparked protests and forced the government into a U-turn but the conditions set by the EU-IMF bailout are binding and tax increases will need to found.

The recent climb down only delays the process for a few weeks.

In Greece yet another rumour is doing the rounds about a financing hole.

The suggestion was made by the German newspaper Der Spiegel and was swiftly denied by the Greek government, who suggested the ‘gap’ would be met buy further austerity measures currently being finalised. Sound familiar?

For the rest of the week the only other data of interest is the 2Q final GDP revisions from the UK and the US.

It is very unlikely that any changes will be made so expect calmish markets for the remainder of the week before we get the BoE & ECB rate decisions and the non-farm payrolls next week.

Spain’s trouble weighing on euro prospects

It has been rumoured that Spain could ask for an official bailout this week from the ECB.Spain's trouble weighing on euro prospectsIt would then become the first country to do so since the introduction of Mario Draghi’s short term bond purchase program announced in the September meeting and this would be in addition to the bank bailout that has already been earmarked for the ailing state.

This could be announced to coincide with the report into the level of aid the struggling banking system needs to stay afloat, rumoured to be anywhere between €60 billion to €100 billion.

This is clearly weighing on investor confidence with Spanish Bond yields on the rise this morning.

Also, in a statement over the weekend that is bound to ruffle German feathers French Prime Minister Jean-Marc Ayrault has said he believes Greece should be given more time to meet the strict debt consolidation deficit targets set by the Troika on the proviso that it shows a sincere approach to the reform process.

This will do nothing to improve relations between the two nations with Germany recently agreeing to the legality of the ESM and are currently in discussions over a possible leveraging of the fund to increase the fire power it holds.

We are seeing the GB Pound/euro climb after the release and we are currently sitting around the 1 week high with EUR/USD struggling to hang onto the 1.29 level. GBP/USD has also begun to weaken this morning.

We have a quiet day in the UK and US today with notable data to watch for this week being US New Home Sales (Wednesday), Durable Goods Orders, Initial Jobless Claims and GDP QoQ with British GDP Thursday.

Spain explores banks bailout by eurozone partners

Up to 60 billion euros (£48 billion) will be needed to bail out Spain’s banks, according to the country’s second biggest lender, BBVA.Spain explores banks bailout by eurozone partnersThe results of independent stress tests of the Spanish banking sector will be published next week on 28 September.

But previews are already being sent to the country’s financial institutions.

Spain’s conservative Prime Minister Mariano Rajoy has in the past insisted Madrid would not become the fourth European capital in recent years to apply for such a bailout, but it now looks as though a programme is now likely.

Spain’s banking sector needs recapitalising, and much of the money would come from the 100bn euros in European Union funds already pledged by eurozone finance ministers in June.

“We’ll get a figure of around 70, 75 or 80 billion euros,” BBVA’s Chairman Francisco Gonzalez said.

That figure includes around 20 billion euros already allocated to troubled banks, which means 50-60 billion euros is still required.

Many in Brussels and beyond now assume it is only a matter of time before Spain becomes the fourth eurozone country to take a bailout.

That is important because of the different manner in which this bailout is being put together.

A European Commission spokesman said it would be wrong to see this as a “kind of proto-bailout” – but to many it does look like a bailout-by-stealth.

Over the last few months Spanish officials have held numerous meetings with their European counterparts, working out what Madrid would have to do to fullfil the criteria of any bailout deal.

Officials say Spain is already living up to any future bailout terms.

Next Thursday Mr Rajoy will unveil the next Spanish budget. Rather than more cuts, more austerity, he is pushing for structural reforms to help him make savings.

Such reforms will form the basis of a bailout agreement with the so-called troika – the European Commission, European Central Bank and International Monetary Fund.

US Dollar rallies on bad Chinese data

We had interesting trade overnight with the release of the Chinese PMI Manufacturing at 47.8 vs 47.6 last month. US Dollar rallies on bad Chinese dataAlthough it has shown a small increase month on month it is painfully evident that growth is still lagging behind in the economy as the policy makers are still keeping the brakes on any further monetary easing.

This was the 11 month in a row of a negative growth figure for the sector.

Although new orders have increased which could still point to stabilisation in the sector.

The euro has been shedding investors this morning with the sentiment regarding Spain’s lack of willingness to request aid from the ECB’s new short-dated bond buying plan weighing down.

Also it has been reported that Greece is in the process of selling assets such as embassies, islands, palaces, airports to meet the final €2 billion of Troika cuts that are required before they receive the next tranche of aid.

Yesterday’s Existing Home sales from the US were better then the consensus coming in at 4.82 million which is the strongest result for two years and with the Fed announcing further QE last week should only get stronger in the coming months.

We had UK retail figures this morning which was expected to show a -.4% fall but came in at slightly better at -.2%, which is still a contraction and will only heighten calls for the BoE to increase the Monetary Easing further.

This worsening picture of the UK economy appears to show the grip of the double dip decision could be spiralling out of control with extreme measures still not aiding the recovery.

BOJ’s turn to ease monetary policy

The Bank Of Japan have followed the recent central banks’ trend of expanding monetary policy. BOJ's turn to ease monetary policyThe move is being perceived as bolder than expected and continues the tone of central banks stretching further to try to insulate against softening growth and potential shocks.

The move will also allow the Yen to weaken or at least remain steady with a major concern being further appreciation in the Yen.

Risk sentiment should be also helped by the BOJ action and further reinforcing the move into risk following the FOMC action last week.

The Bank Of England minutes from the last meeting have been announced this morning and the vote was 9-0 to keep rates on hold.

Most members apart from one member felt no need to expand the QE programme in September, however some felt that QE could be needed in the future and November remains a favourite touted date for the next round.

The minutes did not provide any huge surprises and the Pound is relatively unmoved followed the news.

Money markets predictions on risk continue to be debated

Money markets’ risk appetite continued to improve yesterday post the European Central Bank (ECB) and Federal Reserve actions as well as the many other events that have passed without incident.Money markets predictions on risk continue to be debatedCertainly, the long list of events including German constitutional court decision on the ESM bailout fund and Dutch elections, have not hindered sentiment.

Instead money markets have been left to swallow the impact of monetary policy actions.

Ben Bernanke did not disappoint in this respect and the $40 billion per month of Mortgage Backed Securities (MBS) acquisitions will and already has gone a long way to stimulating risk assets, alongside the boost from the ECB bond purchasing programme.

Even though there are still plenty of doubts, particularly as both Spain and Italy have yet to request a formal bailout which would enable the ECB’s bond purchases to actually commence, the markets’ tone will be ‘risk on’ over the short term.

The US Dollar will remain on the back foot in the wake of more Fed QE, but the US Dollar index will find some support around the beginning of May low around 78.603.

Notably US Dollar short positioning has already increased sharply over recent weeks, suggesting that at least some of the Fed’s QE is in the price.

Conversely euro short positions have been cut sharply and while the momentum in EUR/USD is still to the upside, it will face resistance around the 1.3180.

As long as there is not a sharp correction higher in peripheral bond yields, the euro should remain supported.

FED becalms money markets- but can it last?

It’s been a hectic last few weeks for the wise money markets. FED becalms money markets- but can it last?Both the ECB and Fed announced new policy measures to calm nervous investors, both moves had been widely expected and built in, but the reaction across the markets has been (so far) better than either central bank could have hoped for.

Maybe that is to be expected since we were looking at the real prospect of a eurozone break-up which has now been postponed at least for a while, and continued sluggishness from the American economy.

By tying the latest round of QE to an economic outcome, namely bringing the unemployment rate down, the Fed is explicitly suggesting they will do everything in its power to ensure the American economy gets back on its feet in good time.

The euro- US Dollar currency exchange rate is up four cents in the last two weeks, a big thumbs up from the currency markets to the central banks, but the question is can the recent rally be sustained?

Economically at least the Central Banks’ action has bought time.

That is important because we have two key political events on the horizon – the Presidential election and the expiration of the Bush tax cuts almost immediately afterwards – and it is very important that developments in financial markets do not distract politicians of the crucial job at hand.

Now that focus is turning away from the international stock, bond and currency markets slightly there seems to be an awful lot of potential conflict on the horizon.

Israel and Iran, Spanish & Greek protests, South African miners, Anti-US protestors in Yemen and across South-east Asia and North Africa to name just a few in the last month.

The prospect of conflict in the Strait of Hormuz and what any conflict would do to the price of oil could be enough to derail the best laid plans of the central banks.

There is a bumpy road ahead.