Posts belonging to Category PIGS

Eurozone secures deal on banking union

Overnight we have received news that EU finance ministers have managed to reach a deal for a Eurozone banking union after many months of negotiation.Eurozone secures deal on banking unionStructurally the ECB will have the power to supervise only the largest banks although this brings Europe a big step closer to the goal of integration.

Today EU finance ministers will meet and discuss aid for Greece and Cyprus, yesterday Greece completed its bond buyback programme and overall the euro has been boosted by recent activity back over 1.30 against the US Dollar.

Also today we have Italy and Spain going to the bond markets and it will be important to assess the uptake of the auctions which if positive could boost the euro further.

Elsewhere the US Federal Reserve had their monthly interest rate meeting yesterday.

As expected they replaced the expiring operation twist programme by outright treasury purchases of $45 billion per month confirming a significant expansion of the Feds balance sheet for 2013.

What was surprising however was the announcement of numerical threshold values for unemployment and inflation in relation to rate hikes.

Basically as long as unemployment remains above 6.5% and one to two year inflation expectations are not above 2.5% with long term expectations anchored, then we can safely say there will be no rate hikes.

This is a form of further easing from the Fed by setting clear guidelines and the markets responded positively before being reined in by fears of the looming fiscal cliff.

The focus for today will continue on Europe and any further feedback from EU finance ministers.

In addition progress on the fiscal cliff negotiations will be eyed especially as it is the elephant in the room for the markets at the moment.

Positive Greek bond buyback compounds German economic sentiment

Wise Money Markets in Europe have gained momentum and surged to an 18 month high following the German ZEW economic investor confidence figures released yesterday which showed a jump in December way above market expectations.Positive Greek bond buyback compounds German economic sentimentThe cause was supported in the Eurozone by renewed optimism that Greece has been successful in drawing enough bonds to its sovereign debt buyback to ensure further aid requirements are unlocked by the IMF and EU.

Although the bids attracted €31.8 billion, the price paid for the bonds were higher than expected, meaning the reduction will fall short of expectations.

Consequently, this means that the debt to GDP ratio will be reduced to 126.6% in 2020, contrary to the forecast of 120%-  the currency has raced up to 1.30 levels against the US Dollar.

This positive sentiment in the Eurozone led Spanish borrowing costs to fall, however there are still concerns over the political instability in Italy, which did not seem to stop the surge in the single unit currency.

Over to the US, markets are still trading with cautious fervour as speculation continues to mount that the US Federal Reserve will add to its monthly bond purchases with further QE which also led the currency to weaken.

We still await the results of the 2 day Fed meeting that begins today to hear further details, where they will announce $45 bn of Treasury bond buying.

Though the economy seems to be gradually improving, the Fed continues to add stimulus but may be faced with higher inflation and a weaker dollar in the near future.

The US fiscal cliff talks are also still being discussed as they try and reach an agreement as to the measures taken to reduce their debt, set to come into force in January.

Positive sentiment from the Eurozone coupled with speculation of QE in the US, led Sterling to strengthen against the Greenback as we breached the 1.61 level.

We also expect unemployment figures from the UK later this morning, expected at 7.8%. Any figure that comes out higher than this could lead to a bit of weakness in the pound.

Monti resignation upsets Italian stability

Mario Monti, the Prime Minister of Italy, has announced that he will resign after the 2013 Italian budget is passed prompting the elections to likely be moved forward to February.Monti resignation upsets Italian stabilityThis has continued to weaken the Euro with last week’s announcements that German and EU growth is likely to falter moving into 2013 with Spain flirting with a full bailout if their expectations are met.

A good Non-Farm Payroll figure out of the US last week helped to shock the markets to shore up with many analyst’s expecting a sharp pull back on the figure, mostly related to Hurricane Sandy but it appears Santa Claus may have had a helping hand with employment in the run up to Christmas.

This is likely to produce another fall in US unemployment figure.

As recent trends suggest, the markets will be awaiting the US Fiscal Cliff negotiations and Wednesday’s interest rate decision.

After last week’s Autumn Statement from Chancellor Osborne the news continued to be negative in the UK with industrial and engineering data triggering a sell off on the GB Pound.

With the interest rate decision last week to keep rates and QE on hold likely to continue, the markets will be looking for a positive unemployment figure on Wednesday and looking towards the 19th December for the minutes from this month’s BoE meeting.

A busy week ahead for interest rates with them reaching over 1.31 EURUSD, 1.61 GBPUSD and below 1.23 GBPEUR earlier in the week then once Mario Draghi hit the wire on Thursday fell back to below 1.29 EUR/USD and pushing GBP/EUR above 1.24 again.

Another Central Bank Thursday

Another Central Bank Thursday.Another Central Bank ThursdayToday is again Central Bank decision day for the UK and Europe.

The main focus will be on the ECB and with no change expected today, the market will look for signals on what instruments the ECB will be motivated to use if and when additional easing is needed.

It is looking more favourable that an additional LTRO will be utilised rather than an interest rate cut.

The Bank of England is expected to keep their interest rate on hold and also to hold fire on QE with November the likely meeting where further QE is announced.

We are not expecting big swings on the back of the central bank announcements today but the ECB in particular may provide some light on future sentiment.

Today we see Spain and France with their snouts in the feeding troughs and auctioning government bonds maturing in 2014, 2015 and 2017 and a good uptake is hoped for.

The market will be focused upon Spain in particular; especially as expectations are rising that Spain will officially request a bailout in the near term.

Some good news out of the US yesterday with the ADP report coming in ahead of expectations.

This was particularly positive given the FOMC’s emphasis on labour market conditions and will build expectations of a good payrolls number tomorrow.

In the currency converters markets we have not seen any sizable moves in the G10 currencies as the markets await the central bank decisions and the US non-farm payroll number tomorrow.

Money markets worry about poor econimic data

Manufacturing data out yesterday from both the eurozone and UK was disappointing across the board and started the day with Pound in negative territory against euro and the US Dollar. Money markets worry about poor econimic dataMuch needed US ISM manufacturing data in the afternoon session helped turn the tables back into risk on following better than expected growth compared to the consensus expected.

The US Dollar and euro weakened against GB Pound on the back of the news.

A disappointing start to Nationwide Housing Price Index this morning showing a greater than expected fall in average house prices coming in at -0.4% for the month of September.

UK PMI Construction this morning also came in slightly weaker than expected at 49.5 compared to 49.8 showing yet further falls for the economy, however this did little to move the markets.

After Mariano Rajoy announced last week that if Spain’s borrowing costs remain stubbornly he will not ‘hesitate’ to request a bailout from the ECB, Moody’s says Spain bailout may not rescue all of its banks.

This coupled with the reports that Germany has signalled to Spain- who may now finallybe ready, that it should refrain from requesting a bailout from the ECB, as data released shows that Spain’s jobless numbers has increased 1.7% MoM and continuing protest ravage Madrid.

Overnight the Royal Bank of Australie  cut it’s interest rates from 3.5% to 3.25% owing to growth in China slowing and uncertainty about near-term prospects greater than previous months.

Over the past quarter we have seen growth slow to 0.6% in 2nd Quarter from 1.4% in 1st quarter and this latest cut will hopefully kick start the economy as it approaches its Spring months.

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.

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.

FED’s Ben Bernanke launches QE3

The money markets have extended their risk rally even further after Fed chairman Ben Bernanke has announced a third round of Quantitative Easing (QE) for the US economy. FED's Ben Bernanke launches QE3The move was almost certain; after last week’s non-farm payroll data indicated that the employment levels were very low and as markets turned negative on the recovery of the US economy.

Even though the QE3 announcement has pledged to buy an extra $40 billion worth of assets (mortgage backed securities) until the economy gets back into recovery, Bernanke still insists it may not be enough unless unemployment is driven to lower levels.

The main difference this time is that should it not be enough, they can increase the amount of purchases at any time.

Interest rates are set to be on hold till 2015 in the US and the price of gold soared post the announcement in tandem with the euro crossing the 1.30 mark – trading at its highest level since May 10.

With a weak dollar, post the QE announcement, the surge in the euro was also helped with some positive news from the euro zone as the ESM was ratified and given the go-ahead to aid the eurozone recovery.

Furthermore, not only will the ECB help Spain and Italy by buying bonds from the struggling economies, as they need immediate help, there is also a possibility that they would extend help to Portugal, Ireland and Greece.

The Greek PM has also reinstated that a third bailout package is not necessary, even though most investors continue to anticipate further aid for the troubled economy.

With so many events emanating from the US and Europe, Sterling has managed to ride on the back of euro strength to highs crossing the 1.62 mark, yet fall to two month lows against the Euro to 1.2420.