The pain in Spain

Spain is feeling the pain this morning as the Spain/German 10 year government bond yield spread widened out to 508 Basis points- the highest since November as the Spanish 10 year yield hits 6.50%. The pain in SpainThere is continuing fear surrounding Spanish banks as shares in Bankia fell another 26.75% when trading resumed this morning.

Bankia is a unique case but it is at the moment dragging down confidence in the rest of the Spanish system- the sooner it is resolved the better and pressure is now increasing with the rising cost of borrowing.

Spain have vowed to implement measures and there is talk of an EU bank rescue fund.

The euro whilst still under pressure against the US Dollar is still holding on to much needed support at 1.25.

Recent polls in Greece have highlighted a flip back to the pro-austerity parties which is a relief for the markets and the euro as we open the week despite concerns in Spain.

However we can expect a few swings to come in opinions as we approach election day on June 17.

This week the markets will be looking for concrete signs of action from the EU group as we move into June.

Markets should be relatively quiet today due to a US holiday and for the remainder of the week again economic data will take a backseat as developments in Europe unfold.

Au revoir Merkozy, Bonjour Merde

Developments in France, Greece and Spain continue to weigh on euro sentiment, driving the single currency lower across the board. Au revoir Merkozy, Bonjour MerdeInvestors continue to be risk adverse as European voters take their toll on austerity loving- politicians.

The Spanish government has part-nationalised stricken lender Bankia, taking a 45 per cent stake in exchange for €4.5 billion in emergency loans and we can expect this to be the first of several injections of capital by the Spanish authorities into their struggling banking sector.

The search for a Greek government also looks set to drag on, after the second placed Syriza party in the recent elections failed to form a coalition.

The mandate now looks set to pass to the third placed Socialists in a ludicrous game of pass the parcel, with every failure racheting up the pressure to find a solution.

Much needed bail-out funds are being withheld until a government is in place, but with no end in sight to the election merry-go-round, EU officials need to act quickly to avoid making the situation worse than it already is.

This morning is an important one for Sterling with Industrial Production data due along with the Bank of England announcement on interest rates and the asset purchase scheme at midday.

The IP number for March is expected to show further declines in output but a number to the upside is a possibility after the rebound in construction in the last two months.

As we’ve mentioned before this week, it would be a huge surprise if the Bank of England made any changes to rates or QE.

Australian employment came in much better than expected, 4.9% against expectations of 5.3% catching the markets completely on the wrong side.

The AUD is off around 4% against the USD and GBP over the last few weeks after the central bank cut interest rates and looks set to cut further this year.

The market was quite short the Aussie, and the buying back of those positions has forced a quick 50 point rally overnight.

Scared euro banks park cash back with ECB

Only days after gifting european banks nearly half a trillion euros, the European Central Bank (ECB) has reported receiving record cash deposits of 412bn euros (£344 billion). Scared euro banks park cash back with ECBThe total beat the previous record of 384 billion euros set in June 2010.

The rising usage of the ECB deposit facility since the summer reflects nervousness among Europe’s banks about lending the money to each other.

The latest jump in deposits comes from cash lent to the banks by the ECB itself last week in order to ward off a fresh banking crisis and credit crunch.

The central bank provided 489 billion euros of its new three year loans just before Christmas, of which banks used some 200 billion euros to repay existing debts.

The rest has gone into cash accounts, including the deposit facility.

Cash from those loans arrived in the banks’ accounts on Friday 23rd- just before Christmas.

The ECB’s decision to offer the three-year loans – as well as a significant broadening of the types of collateral that the ECB would accept from the banks as security for its loans – had appeared to settle financial markets in the run-up to Christmas.

Prior to the ECB’s interventions, there had been growing fears in the international financial community that a major European bank was about to run out of money and go bust, threatening to spark a full blown money market meltdown.

The ECB has in effect had to fill the role of a safe intermediary in the market for short-term lending between the banks – which is crucial to their functioning – by receiving their spare cash as deposits, and then lending it back out to those banks that find themselves short of ready money.

But the banks have to pay a price for the safety provided by the ECB.

They must pay approximately 1% interest on the loans they receive from the central bank, whereas the ECB pays them only 0.25% annualised interest on the spare cash they put in the deposit facility.

UK banks credit ratings downgraded by Moody’s agency

Moody’s has downgraded the credit rating of 12 UK financial firms including Lloyds TSB, RBS, Nationwide and Santander UK.UK banks credit ratings downgraded by Moody's agencyThe ratings agency said it now believed that the UK government was less likely to support firms that got into trouble.

However, the firm emphasised that the downgrades did not “reflect a deterioration in the financial strength of the banking system”.

Moody’s also downgraded nine Portuguese banks, blaming financial weakness.

Shares in both RBS and Lloyds were among the FTSE 100’s biggest fallers, down 3.7% and 2.7% respectively in afternoon trading.

Seven UK building societies were among the firms downgraded, a move that the Building Societies Association (BSA) called a “normalisation” that had “been expected for some time”.

“It does not represent any change in financial strength and it is business as usual across the sector,” the BSA said.

Analysts and investors watch closely the ratings that firms such as Moody’s put on the creditworthiness of companies and governments.

Along with Standard & Poor’s and Fitch, Moody’s is one of the big three agencies. Their ratings influence heavily the amount interest that companies and governments pay to borrow money.

“The downgrades have been caused by Moody’s reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support… for five larger, more systemically important financial institutions.”

The downgrades include a two-notch cut for government-controlled RBS, to A2 from Aa3, and a cut of one-notch, to A1 from Aa3, for Lloyds TSB, a division of part-nationalised Lloyds Banking Group.

Spanish bank Santander had its UK business downgraded by one notch, to A1 from Aa3, while Nationwide Building Society suffered a two-notch cut, to A2 from Aa3.

Other institutions downgraded were Co-operative Bank, and the building societies Newcastle, Norwich & Peterborough, Nottingham, Principality, Skipton, West Bromwich and Yorkshire.

The rating cuts did not concern HSBC, Barclays or Standard Chartered, Moody’s said.

RBS said it was “disappointed” that Moody’s announcement did not reflect the “significant progress” the bank had made to restructure it finances.

Lloyds said that it believed Moody’s was reflecting what was already understood in the market, and that it would “have minimal impact on our funding costs”.

Nationwide said that Moody’s announcement was part of an industry-wide review, and “not a reflection of Nationwide’s business model”.

The Chancellor, George Osborne, said one reason for the downgrades was that the government was seen to be “trying to deal with the too-big-to-fail problem”.

Mr Osborne said he was confident that British banks were well-capitalised. “They are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment.”

Moody’s split the downgrades into three categories.

Banks with a “high likelihood of support” are RBS and Lloyds.

Banks or building societies with a “moderate or high likelihood of support” are Nationwide, Santander UK, Co-operative Bank, and Clydesdale Bank. Clydesdale’s rating was reaffirmed, not cut.

George Osborne: “They think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain”

Money markets panic after US downgrade

Following the carnage from both sides of the Pond last week, the money markets will aim for some form of restoration and degree of normality in the early sessions of trading this week.  Money markets panic after US downgradeThis could prove difficult, following continued worries about global economic growth, concerns over the eurozone debt crisis and finally late on Friday the downgrade of the US sovereign credit.

This all comes at a time when many top policy makers are on vacation and market liquidity is thin during the summer holiday period.

It was hardly a huge surprise when the US lost its top AAA rating last week.

S&P had been warning the US for several months about a possible downgrade and when the smaller than hoped for $2.1 trillion cuts in the US fiscal deficit were announced, this left the rating agency little choice.

Some consolation will be taken from the fact that the other two main ratings agencies Moody’s and Fitch have so far maintained the top tier rating for the US, although Fitch will be reviewing this before the end of the month.

Inevitably comparisons to 2008 are being made, however there is fundamental difference this time around.

While in 2008 policy makers were able to turn on the financial and monetary taps, the financial clout of governments is now in question.

There is little room for manoeuvre on government spending in western economies as this has now been totally used up, while interest rates are already at an all time low.

One could argue the US Federal Reserve can embark on another round of asset purchases but the effectiveness of more QE is very limited.

Confidence is pretty low right now so what light if any is at the end of tunnel?

EU officials had hoped that their agreement to provide a second bailout for Greece and beef up the EFSF bailout fund would have stemmed the bleeding but given the failure to prevent the spreading of contagion to Italy and Spain it is difficult to see what else they can do to stem the crisis.

One could compare the EU attempts to sticking a plaster on a fatal wound.

Although it is unlikely that the eurozone will disintegrate (more for political rather than economic reasons) there may have to be sizeable fiscal transfers from the richer countries to the more highly indebted eurozone countries otherwise the whole of the region could fall down the plug hole.

Wise money markets stressed by euro bank test results

A real jumpy session in the US last night with Standard & Poor’s decision to join Moody’s in placing the US long-term sovereign rating on creditwatch negative countered by Ben Bernanke’s follow-up testimony, within which he played down the probability of the introduction of a further tranche of monetary stimulus. Wise money markets stressed by euro bank test resultsThe Dollar’s value swung sharply back and forth within a tight range, ending the New York trading day very little changed.

This then gave the Asian market little cause to push the currency around, which was in fact the case.

Europe arrived this morning with exchange rates having barely shifted from where they had been left yesterday which, with no European data scheduled, doesn’t bode well for early volatility.

That’s not to say that the session won’t provide some excitement.

At 5.00pm this afternoon, the results from the latest round of European banks’ stress tests are published and traders will await their publication with a high degree of trepidation.

Rumours abound of selective disclosure and poor results from several of the institutions based in the peripheral countries of the Eurozone.

The reports should include details of sovereign bond holdings which, in the current climate, could create a fair amount of disquiet over the health of the banks in question.

This in turn will raise doubts over the resilience of each country’s banking sector to an escalation of the current debt crisis.

This in turn must leave the Euro vulnerable today, even though any results are unlikely to be released until after most traders have closed their books for the week.

For economic data, we will need to await US opening and like yesterday, there is a raft of top tier numbers scheduled for release.

Market analysts are predicting a stronger outcome across the board which, if borne out, will undoubtedly lead to a firmer Dollar as we approach the weekend.

UK banks gain on reform report

This morning saw the release of the Independent Commission on Banking (ICB) preliminary report on competition and stability in the financial sector. UK banks gain on reform reportRumours of a recommendation to break up Britain’s largest banks did not materialise, and shares in Barclays and Lloyds Banking group were up in early trading on the news.

The report did call for core tier one capital ratios of at least 10 per cent, higher than the current 7 per cent level and it also recommended the ring fencing of savers deposits from risky investment banking operations.

Full details of the report will come out over the course of today, but there will the main criticism will be that  the recommendations maintain the status quo, and do not go far enough in the reforms attempting to prevent the next banking crisis.

The Euro shrugged off an interest rate rise and Portuguese bail-out last week and continues to trade very strongly against the Pound and Dollar.

Sterling conceded further ground over the weekend as Germany announced an upgrade of GDP, even as details of Greek debt restructuring emerged and talk of Irish negotiations on their debt continued.

Over on the other side of the pond with a temporary US budget deal finally agreed – and governmental shut down avoided – all eyes are now on Thursday when this stop gap measure runs out. US data this week include advance retail sales, CPI and University of Michigan confidence survey.

London Stock Exchange flotations increase but overall decline in global rankings

The number of new flotations on the London stock market soared by more than 500% during 2010 but there was a huge decline in overall cash-raising amid gloom over a sluggish western economy.
London Stock Exchange flotations increase but overall decline in global rankingsMore than £10bn was raised through Initial Public Offerings (IPOs), though many of the 89 companies involved were based overseas and the numbers were modest compared with those seen before the banking crisis.

They were also a fraction of the global figure which is expected to reach £190 billion thanks to a huge surge in activity around China and the rest of Asia.

The overall amount raised in London in the past 12 months was £23.8 billion, down from £77.4 billion during 2009 and £66.7 billion for 2008.

Among the local companies floating in London was online grocer, Ocado, and SuperGroup, the owner of fashion brand Superdry.

The biggest single cash raising was done by foreign firms including Essar Energy of India which raised £1.3 billion.

The LSE was particularly pleased that it had attracted high profile listings from India, Russia, and the Middle East but there was little comment on the slump in overall cash raising or the fact that some listings had struggled badly.

The price of winning an IPO for Ocado was to slash the starting price and yet shares in the company, whose vans are seen on most high streets, continue to trade below its float price. The same is true of Betfair, the online sports betting operator which floated to great fanfare at £13 a share in October

Overall £ 9 billion was raised through 46 IPOs on the main London market while almost £1bn was obtained through similar moves on the junior Aim market.

The £9 billion raised on the main market compared with more than £20 billion in 2007 and in 2006

The general trading position for stocks and shares over the last 12 months has been relatively good with the FTSE-100 index of top shares on track for a rise of 11% year on year. The same index hit 6,000 points last week – its highest level since June 2008.

But companies have been wary of engaging in secondary cash raising while growth prospects in many sectors remain uncertain. The Aim market showed smaller firms more positive with the total amount raised in 2010 up 12% on 2009.

The amount of activity in London is muted when compared with booming financial centres such as Hong Kong and Shanghai. Agricultural Bank of China raised £14 billion over there recently – the biggest float in history.

Record spike in EMU default risk after fears of Greek restructuring scare

The cost of default insurance on eurozone bonds has surged to an all time high on reports that Greece is preparing the way for a sovereign debt restructuring after 2013, with tacit support from the EU authorities.
Record spike in EMU default risk after fears of Greek restructuring scareThe disputed claim came as Fitch Ratings downgraded both Portugal and Hungary and placed five Greek banks on negative review.

Fitch cut Portugal’s rating one notch to A+, warning that the economy is caught in a low-growth trap.

Plans to cut the structural budget deficit by 4pc of GDP next year “will be extremely challenging especially if, as Fitch expects, the economy falls into recession next year”.

The Greek newspaper Ta Nea said Athens was examining plans to impose a cut in interest rates on its debt and to extend maturities once the £94 billion rescue deal from the EU and the International Monetary Fund expires in mid 2013.

The proposals stop short of “haircuts” on the principle of the debt and would be done in a co-operative fashion with bondholders. While this would qualify as an orderly restructuring of debt, it is tantamount to default.

Ta Nea said Brussels had given a “green light” to the idea, provided that Greece complies with the terms of its fiscal austerity package and carries out deep structural reforms.

The European Commission denied that it had given its blessing for “any restructuring of government bonds by Greece or anywhere else”.

The claims caused a wild spike in credit default swaps for Greek debt, with ripple effects across the EMU periphery.

Markit’s iTraxx XSov index measuring risk on eurozone sovereign debt surged to a record 208 basis points in intra-day trading, though the moves may have been distorted by a lack of liquidity in the run-up to Christmas.

If Greece becomes the first country in developed Europe to restructure sovereign debt since the Second World War, it breaks a powerful taboo and risks opening the floodgates to serial defaults in southern Europe and Ireland.

Greek premier George Papandreou lashed out at the rating agencies on Thursday as the Greek parliament passed its 2011 austerity budget, accusing them of double standards. “They belittle the efforts of entire peoples and answer to no one,” he said.

Mr Papandreou said Greece had “gone through hell in 2010” but had staved off bankruptcy and would confound the “domestic and international Cassandras of disaster”, but he also took issue with the “myth” that Greece was the target of a foreign attack.

“Our own past errors are to blame, and we must recognise that,” he said.

The budget squeezes a further €18bn in spending cuts and tax rises to bring the budget deficit down to 7.4pc of GDP next year.

The measures are a pre-condition for a €15bn tranche of EU-IMF money in February.

Under the rescue deal, Greece’s public debt will peak above 150pc of GDP by 2014. Since investors cannot see how the country will avoid a debt compound spiral at such a level, Greek bonds are already trading at default levels.

European Central Bank worries about the rationality of Irish bail out

The European Central Bank (ECB) has expressed worries that the process of the Irish Republic’s £72 billion bail out package could affect its ability to provide further support to eurozone members.
European Central Bank worries about the rationality of Irish bail outThe bank said that flaws in the Irish bail-out legislation could compromise its ability to provide collateral for future funding.

It said it had concerns over the quality of collateral to cover loans.

On Friday, credit rating agency Moody’s cut sharply the Republic’s debt rating.

“The ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the euro system,” the bank said in a recent paper.

It questioned the powers granted to the Irish Finance Minister Brian Lenihan by the draft law “interfere significantly” with the rights of shareholders and creditors of financial institutions.

“Furthermore, the ECB suggests further clarification that the rights of the central bank and the ECB, as creditors of any relevant institution, will not be affected,” the bank said.

It added that the paper, was a response to a request from Mr Lenihan for its opinion on draft legislation granting him extra powers to ensure the Republic’s financial stability.

It said it “welcomed” the request and understood “the need for an accelerated legislative procedure”, but said it would have “appreciated being consulted at an earlier stage”.

Last week, the International Monetary Fund (IMF) approved a three-year loan of 22.5bn euros for the Republic.

The funds form the first part of the IMF’s contribution to the EU and IMF rescue package.