Articles from March 2013

US strong sales data continues

Risk sentiment improved again following strong US data.US strong sales data continuesDurable goods came in higher than expected and housing data indicated an improvement for the first part of 2013.

The only negative news coming from the US was that consumer confidence fell as consumers have become more pessimistic about short term economic prospects.

This could be as a result of an increase in taxes which has coincided with a rise in gasoline prices.

However the underlying economic data so far is still coming in robustly and this is supporting the equity markets and overall risk sentiment.

Last night, credit ratings agency Fitch put Cyprus on negative watch saying that “the shock resulting from the systemic failure of Cyprus’s banking system will have profound negative implications for the domestic economy, which heightens the risk for public finances”.

The market is certainly still digesting what the future implications of the bailout could be for depositors in other euro countries and this is weighing on the euro as contagion is feared.

Today we have speeches from Federal Reserve members and the markets will be looking for feedback on the Fed’s bond purchases in the light of an improvement in US data.

It is likely that they will reiterate that bond purchases will remain until a substantial and prolonged improvement in the labour market is perceived and the consensus will be that we are not there yet. Aside from this it is a relatively light data day as we head into the Easter weekend.

Cyprus bailout deal leaves wise money markets unconvinced

The Cyprus crisis continues even though the bailout has been agreed.Cyprus bailout deal leaves wise money markets unconvincedIn a measure that was reached, they have come to a conclusion that all deposits of over € 100,000 will be hit by losses of over 40 percent as those under the mark will remain safe.

This has spooked markets moving them into negative territory throughout the region with almost every European Index plunging, as Cyprus heads into its 12th straight day of bank holidays, amidst concerns that most people will try and move out their funds in large numbers and would prefer to hold cash.

The negative sentiment is also enhanced by rumours that this format will be adopted as a template for any further bailout schemes.

Although top officials deny any such move in the future, markets are still wary that this format will leave the banks with fewer deposits and in turn will allow them to lend less, shrinking growth.

The euro as a currency has taken a hit and trades this morning at a rate of 1.2825 against the Greenback.

Meanwhile, there are also reports from Spain, that economic climate in the country will further deteriorate this year and shrink by 1.5 per cent.

Over to the US, where there was a glimmer of good news for US equities after figures showed orders for US durable goods rose by 5.7% in February whilst housing data also demonstrated a steady rise in prices.

Markets are fairly positive that the world’s largest economy is finally starting to experience some steady growth following years of stagnation.

As per February’s slump in consumer confidence, most people are still concerned on the Budget talks that continue in Washington.

However, the US dollar has managed to maintain strength as investors look to it as a safe haven with the on-going turmoil in the eurozone.

The positive US data releases, has done little to cheer up Sterling, as the currency was unable to cash in.

Retail sales in the UK for March were flat compared with a year ago as per the Confederation of British Industry, and the GBP/USD pair traded between a range of 1.5134 – 1.5206.

Eurogroup comments sent wise money markets into freefall

The wise money markets panicked yesterday following the head of the eurogroup stating that Cyprus’s bailout could set a president for similar deals that involve bank depositors.Eurogroup comments sent wise money markets into freefallThe situation showed little sign of easing last night, with the Cypriot central bank saying that banks would now stay shut until Thursday.

Yesterday’s session was a game of two halves; initially investors had given a cautious green light to save the Med Island from economic failure.

However peripheral stocks and bonds gave back earlier gains when traders swiftly returned to safe haven assets after Jeroen Dijsselbloem warned the new method could be used in future bailouts.

“We should aim at a situation where we will never need to even consider direct recapitalisation. If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller,” he stated.

“I think the approach needs to be, let’s deal with the banks within the banks first, before looking at public money or any other instrument coming from the public side. Banks should basically be able to save themselves, or at least restructure or recapitalise themselves as far as possible.”

This latest scheme differs from former bailouts where savers have been left unharmed.

In Cyprus insured depositors in distressed banks and all savers in other lenders kept their money, while those with uninsured sums in the failing banks took sizeable hits.

A bad bank is being formed and the remains of second-largest lender, the Popular Bank of Cyprus – or Laiki will be merged with the Bank of Cyprus.

Finally over to the US and consumer confidence is projected to drop back from a three-month high, demand for large-ticket items are expected to surge 3.95 in February, while the S&P/Case-Shiller Home Price index is estimated to show a year on year figure of 7.8 percent in January, which would signal the sharpest return to growth since June 2006.

The anticipated 3.9 percent drop in New Home Sales may have limited impact after marking the biggest advance since 1993 during January, while the Richmond Fed Manufacturing index is likely to hold firm at 6 in March.

Drinks all around as Cyprus agrees bailout

As the crisis in Cyprus continued to weigh on market sentiment we saw some positive retail data continuing to show support for the UK.Drinks all around as Cyprus agrees bailoutFriday saw an unexpected fall in business sentiment and expectation in Germany adding further fuel to the negative fire that is burning in the eurozone.

Overnight however, Cyprus along with the ‘troika’ agreed on a bailout to save the nation and keep the country in the euro at the cost of large shake ups in the banking sector with failing lenders being split into good and bad banks and a one-time levy imposed on bank deposits, which is rumoured to be up to 40% on amounts over €100,000.

On the back of the good news the markets have rallied however, the Euro is still struggling to find its feet again as investors digest the bailout and repercussions. GBP/EUR is holding just above 1.17, EUR/USD struggling at 1.2980’s and GBP/USD sitting snugly at 3 week highs over 1.52.

Looking ahead in the UK, this week we have mortgage approvals on Monday which are expected to show an increase.

The final revision of 3rd Quarter GDP figure on Wednesday is expected to reaffirm that the U.K. is on track for a triple dip recession coming in at -0.3%.

Next month’s GDP figure will be interesting to see how the U.K. has fared in the first quarter of 2013 and if it has, as chancellor Osborne said, avoided a triple dip recession.

This evening Ben Bernanke is speaking to the London School of Economics, which is unlikely to cause any volatility.

Core USA durable goods order are expected to show a sharp fall this month to 0.5% from 2.3% with New Home Sales expected to have slowed down last month also.

The big ticket data will be Thursday’s final GDP revision figure that is expected to be adjusted upwards again to 0.5% growth versus 0.1% last quarter.

Also on Thursday, initial jobless claims (expected to rise slightly) and continuing claims (expected to decrease slightly) to produce signs of a more stable jobs market.

Cyprus jumps into bed with Russia- and bounces straight back out again

The Cyprus saga continues to dominate euro trading, but there looks to be an end in sight after Cypriot finance minister Michalis Sarris left Moscow without a Russian backed deal in place.Cyprus jumps into bed with Russia- and bounces straight back out againWhether a deal was ever on the table or was simply a bargaining tool by the Cypriot government is unclear, but not even an extension to a €2.5 billion loan was agreed, the very minimum hoped for.

Today the Cypriot parliament will vote on proposals to restructure the two largest banks imposing up to a 40 per cent tax on deposits over €100,000 according to reports this morning.

Under the 100,000 mark are expected to be protected. With Banks closed until Tuesday a ‘no’ vote today would not be the end of the world, but would certainly test the patience of its Troika paymasters which is already at breaking point after an initial deal was rejected and Cyprus tried to hop into bed with Russia.

In fact German Chancellor Angela Merkel stated Monty Python style in parliament this morning that Cyprus is a very naughty country indeed. We can expect this to go down to the wire. The euro will remain under pressure until a deal is in place.

Away from the eurozone and the debate over Wednesday’s budget rumbles on, mostly over government backed guarantees for mortgages and a relaxation of planning law’s.

You get the feeling George Osborne would happily have cancelled this year’s budget, but obliged to say something he trotted out the very minimum possible.

Sterling was relatively unaffected by a fairly bland fiscal budget overall, so we’ll leave it at that.

More importantly Mr Osborne did announce new powers for the Bank of England, including forward guidance and the Banks new powers that will dictate the path of the Pound over the coming months.

Next week should be a busy one with the early part taken up with a bail-out of Cyprus (hopefully). US durable goods orders and consumer confidence follow midweek and finally German unemployment on Thursday.

UK Budget and Bank of England minutes boost Pound

Yesterday the Chancellor announced the budget and the Pound responded positively on the news that the Bank Of England (BoE) will retain its two per cent inflation target, although more feedback will be provided if inflation is above the two per cent level- a similar system to that in the US.UK Budget and Bank of England minutes boost PoundThis overall reduced the possibility of imminent further QE for the UK economy and the Pound was also boosted from the BoE minutes showing a similar vote for QE in March to February.

The Office for Budget responsibility (OBR) halved its growth forecasts for 2013 to 0.6% and raised its inflation forecast upwards along with debt projections- so on the face of it more pain and no gain. However the pound did not respond negatively and actually picked up on the day.

The global markets continue to show resilience to the worsening situation in Cyprus.

The situation remains bleak as the government tries to put together a plan B after plan A was dramatically rejected in a vote.

It is expected that the banking system and the local financial markets will remain closed well into next week and the uncertainties will persist and weigh on the euro especially.

Elsewhere, we have seen economic sentiment boosted by better economic feedback from China and the US Federal Reserve. The Fed has affirmed its commitment to QE until its sees meaningful and substantial improvements in US labour markets- in other words, it is not quite there yet.

Chinese PMI data for March rose to 51.7 for 50.4 in February and this was above the expectations and good news from the Chinese economy and global sentiment.

Cyprus rejects EU bailout- as euro exit feared

Wise money markets have opened this morning, in turmoil, as the Cyprus crisis continues to drag on, weighing heavily on the eurozone.Cyprus rejects EU bailout- as euro exit fearedThis comes after the country’s parliament rejected the bailout plan that was to levy banks with a deposit tax of 6.6 percent on deposits under €100,000 and 9.9 per cent above the mark, to make up € 5.8 billion, as aid.

Although politicians tried to soften the blow, by pushing for no tax on the smaller accounts and up to 15 percent on the larger deposits, there was not a single vote in favour of the package.

All 36 votes declined the package while 19 votes were abstained.

Cyprus’ finance minister flew into Russia to ask for aid, in keeping with their vested interests of higher value depositors. For the time being though, while a ‘Plan B’ is discussed, the ECB is keeping markets steady, as Cyprus extends their bank holiday by another day to avoid funds being transferred out of the country rapidly.

If Russia does not provide the aid, with the Eurozone leaders adamant not to sanction further funds, it could be a very volatile time for the markets as there could be a possibility of a Euro exit or a very strained relationship for Cyprus with the eurozone.

We are currently just above the 1.29 mark on EUR/USD.

In other news, we had ZEW economic surveys for Germany which came in at 48.5 and the economic sentiment for the Eurozone which was at 33.4.

In the wake of all the turmoil, German numbers continue to strengthen while other European numbers stumble.

Over in the US, housing permits came in better than expected at 4.6% but the figure has done little to cause any volatility in the markets.

From the UK, we expect employment figures later this morning. Also, it was reported that UK inflation accelerated to the fastest pace in nine months in February.

As higher energy and rising fuel prices continue to squeeze consumer spending, the UK is braced for another austerity budget by George Osborne today, along with the Bank of England minutes.

Cyprus dominates the wise money markets

In Asia trading the wise money markets move was driven from the ‘fear gauge’ spiking in the wake of increased risk aversion.Cyprus dominates the wise money marketsFollow through looks limited, however. Investors seem calmer as the fear following the news of levy of bank deposits in Cyprus as part of a €10 billion bailout for the country, eased.

No sign of bank runs elsewhere in the Eurozone and the go ahead to make the deposit levy more progressive (ie a higher levy on bigger deposit holders) while retaining the total amount at around EUR 5.8 billion, have helped to calm pressures.

Nevertheless, today’s delayed vote in Cyprus’ parliament to authorise the levy could incite more tension particularly as the result is too close to call.

Therefore the spot light will remain firmly on developments in Cyprus, with economic data taking a back seat.

The highlights on the data front include likely gains in the German March ZEW investor confidence survey and US February housing starts and building permits.

Currency volatility appears to be restricted ahead of the Cyprus vote and then the Fed FOMC outcome tomorrow.

The Single European currency remains the weakest link, with gains in the currency likely to be sold into although support around EUR/USD 1.2876 is likely to hold if the Cyprus vote flops to recommend the deposit levy.

If this is the case, expect further sharp pressure on the Euro and a much bigger drop in the currency and risk currencies overall. European and Cyprus officials would have to return back to discussions but during the period of uncertainty panic would arise.

The Reserve Bank of Australia minutes released overnight maintained that the door remains open for further policy rate cuts although they did note that the economy is responding to previous cuts with the impact having further to run.

There is little in the minutes to suggest further easing is imminent. The RBA minutes are unlikely to dent the Aussie which remains buoyant having managed to remain well supported even despite the Cyprus panic.

EU bails out Cyprus

The European Union has finally provided a 10 billion euro rescue package to the Cyprus government with the majority of the bailout going to two of the largest Cypriot banks.EU bails out CyprusHowever the EU has requested that Cyprus mobilise internal resources meaning that a one off levy will placed on residents and non-residents depositors, as without this the bailout, it would leave an unsustainable level of GDP-debt ratio which could soar to 145%.

This has caused the euro to weaken this morning against a basket of currencies primarily US Dolar and the GB Pound however the rally has already started show signs of retracement.

The EU has also shown that it may be willing to adopt expansionary fiscal policy to help boost growth, this was pushed forward by France, Spain and Portugal while Germany,

Austria and Finland had called for further austerity. The compromise was short-term targeted measures to help boost growth and tackle the high unemployment.

The UK chancellor is due to release the UK budget on Wednesday with little change expected despite the recent weak economic data, the markets will be looking as to whether the chancellor mentions a change in the Bank of England’s mandate such a move should cause sterling to weaken further.

The monetary policy committee minutes are due out on Wednesday which will be looked at closely to ascertain the current bias towards an increase in QE.

In the US, strong data has continued with retail sales increasing despite the tax hikes that have taken 1.5% out of households disposable income alongside an improving job market seen from the strong US jobs report released earlier in the month.

The FOMC meeting is on Wednesday where it is expected that Bernanke will reiterate that the economy is still on the road to recovery and that the labour market is still not at the required level to suggest an exit from QE, further enforcing this by stating that the risks of continuing the current QE program outweigh the potential costs.

King finally talks up the Pound!

The Bank of England Governor Mervyn King delivered a surprisingly upbeat assessment of the UK economy in an interview yesterday.King finally talks up the Pound!He suggested after stripping away the effects of North sea oil production and construction, the UK economy grew at 1.5 per cent in 2012 and is forecast to grow at 1.2 per cent this year.

Mr King also suggested the Bank was not trying to talk down the Pound and that after recent falls is now ‘properly valued’.

Very interesting indeed, a complete U-turn from extremely downbeat Inflation report last month and the news has lifted the Pound significantly since yesterday afternoon.

Next week’s Bank minutes become even more intriguing given Mr King voted for further asset purchases last month.

Will his recent comments be a smoke screen for further expansion of the asset purchase scheme or does he really think the UK economy is back on track?

Is he just offering an upbeat assessment because he is at the end of his tenure?

With the Budget also due next Wednesday, next week is going to be a busy one for the market.

Mr King hinted he had been in talks with the Chancellor over supply side reforms. He refused to go into any details but one can expect some of these to be announced on Wednesday. The Chancellors hand is being forced by economic stagnation.

Next week also sees UK jobless claims released on Wednesday and rounding off one of the busiest days of the trading calendar this year the Federal Reserve rate decision.

With the recent US data increasingly positive, thoughts are now turning to the Fed hinting that policy may have reached its limit and indicating discussions are beginning on the withdrawal of stimulus.

The Dollar is increasingly trading like we saw before the financial crisis, but we are entering unchartered territory for currencies as central banks begin to withdraw money from system.