Gold plummets

A disappointing day for risk assets yesterday threatens to advance further.
Gold plummetsWeaker than expected data from China and the US dragged on market sentiment supporting the theory that the worldwide economy is repeating the pattern of Q1 strength followed by weakness over the remainder of the year.

Growth fears aided to worsen the drop in gold prices with the valuable metal plummeting by 15.5% this month alone whilst weighing heavily on other commodity prices.

Data releases today include CPI inflation in the US, Eurozone and UK alongside the German ZEW investor confidence survey, US industrial production and housing starts.

The Eurogroup and Ecofin statement of an extension of Irish and Portuguese loans and the disclosure that Cyprus will need even more funds than previous estimates (EUR 23 billion compared to EUR 17.5 billion previously) has been taken in its stride by markets.

Given market sensitivity to weak data any discontent will strengthen the risk off tone but this appears doubtful as the data overall is expected to be somewhat healthier.

The Aussie was struck by weaker Chinese data releases and worsening in risk appetite.

While the drop has been sharp over recent days Australian Dollar is unlikely to fall much more, with an abundance and sufficient appetite for the currency around 1.0300. Nevertheless, AUD/USD has dropped below its 100 day moving average level 1.0414 – a breach of which threatens to mark a stronger downward move.

Finally, UK Inflation is expected to rise another 2.8% in March and persistent price growth may increase the demand for Sterling as it diminishes the Bank of England’s (BoE) space to expand on QE.

As the central bank expects a slow but sustainable recovery in Britain, above-target inflation should keep the MPC on the side-lines, and we may see a growing number of BoE officials adopt a more neutral to hawkish tone for monetary policy as the Funding for Lending Scheme continues to work its way through the real economy.

US Dollar surges on nervous money markets

Another week has rolled by and we are still no closer to any sign of a plan for the ever escalating euro crisis. US Dollar surges on nervous money marketsSpain’s cost of borrowing is creeping higher once more as reports of almost €100 billion has been pulled out of Spain by investors highlighting the growing lack of confidence.

Again we are hearing lots of commentators reiterating that more work needs to be done to avoid a disintegration of the eurozone but we are yet to see any solid action to back this up.

The money markets are painting a picture of fear and uncertainty with the safe haven US Dollar surging higher against the euro and the Pound.

In May alone the US Dolar has gained over 7% against the euro and over 5% against the Pound.

The polls have now closed in Ireland for the fiscal treaty referendum, early reports indicate that despite a low turnout the vote should be a “yes” which will prevent further pressure on the euro.

Economic data today from Europe was looking grim with Eurozone PMI coming in at 45.1 and the lowest since June 2009, the Italian jobless rate hit 10.2% in April which is the highest since Jan 2004 and the German new car market declined by 7% in May.

If even the Germans are struggling to sell cars should we all be worried?

Despite all the negative economic press I hope you have a great long Jubilee weekend!

Wise money markets take a punt on risk again

Encouraging economic developments provided wise money markets with an appetite for risk again. Wise money markets take a punt on risk againDespite weaker than expected US durable goods orders, a rise in US consumer confidence to its highest since February last year provided stock markets and risk assets with an overall a boost.

It was a similar story in Europe as Italy held a successful auction of 10-year debt at a lower than expected cost at the same time as Portugal approved a third review of its bailout agenda.

However, there was some negative news, with the ECB momentarily deferring the eligibility of Greek bonds as security for its backing and Eire calling a referendum on the European fiscal compact.

Nevertheless, expectations of a strong take up at today’s ECB second 3-year Long term refinancing operation (LTRO) should keep markets on the straight and narrow for the rest of this week.

As for the US Dollar and given the upbeat equity market mood overnight it is no shock that the Greenback was on the slide as the euro appears determined before today’s 3-year LTRO by the ECB.

Bernanke’s Semi-Annual Monetary Policy Report later today will provide the Dollar some bearing but no major surprises are expected.

The euro will continue to rally against the US Dollar if we are correct about a strong euro 600-700 billion take up at the LTRO but it will interesting to see if the 1.35 level can be breached.

Ben wants more QE but Obama doesn’t

After dipping briefly  under 1.60 over the past week, the Sterling-Dollar pair snapped back sharply in late trading last night as firstly Fed Chairman Ben Bernanke refused to rule out further QE and secondly, after threatening to do so last month, Moody’s placed the US on review for a downgrade of its credit rating. Ben wants more QE but Obama doesn'tAlthough Mr Bernanke did not outline much more than the market already knew from the minutes from the last Fed meeting, the fact that the words came from his mouth and not in text seemed enough of a reason for traders to sell the Dollar off against the Euro and Sterling, with cable jumping one and a half cents in quick time.

The potential ratings downgrade came as US President Barack Obama walked out of budget talks, raising the fear that a deal on raising the US debt ceiling before the US Government runs out of money is looking increasingly unlikely.

Later today US retail sales are due, and will probably show a modest decline, as retail sales ten to do over the summer months.

On Friday we also have the US CPI number and the U of Michigan confidence survey.

With EU banking stress tests due late on Friday evening, we’ve had the first indication that some of the banks are struggling to pass.

German public sector bank Helaba is rumoured to have pulled out, giving regulators a real headache the day before the results are due.

The key point in doing a second round of stress tests was their credibility, and the fact that it would cover all systemically important EU banks.

If Helaba pulling out marks the first of several banks following suit, the whole purpose of the project, namely to restore confidence in the European banking system will be undermined.

After the market volatility in Italian bonds and bank shares, this morning’s Italian Debt auction takes on more significance.

With many economists suggesting Italy is too big to fail, any sign of weakness will be magnified hugely.

Speculation is mounting that the ECB or Italian central bank may buy some of the bonds to signal to the market that demand is high and to keep yields suppressed.

As we know with Greece, Ireland and Portugal when the cost of insuring the bonds raises above 400 basis points bad things start to happen; both Spain and Italy remain around 300.

Even with all the negative Euro news, the news from the US yesterday evening has pulled the Euro higher against both Sterling and the Dollar.

Contagion- is the word for the day

As much as European bankers try to stop it, contagion appears to be spreading through the Eurozone with Italy’s high debt burden and lack of political will leading to more emergency meetings.  Contagion- is the word for the dayReports that their debt stands at double Greece, Ireland and Portugal combined led to equity markets slumping and bond spreads jumping.

Europe signed a treaty to establish a permanent €700bn bailout fund, but this is only available from 2013.

In the meantime, a second bailout for Greece is still being agreed with the hope this will shield Italy.

Last night, Moody’s downgraded Ireland into the junk territory saying “it is likely that, like Greece and Portugal, Dublin will need another bailout before it can return to the markets.

Meanwhile, the UK received some unexpected news with a fall in inflation; the first negative number for June since 2003.

The figures showed CPI inflation rising by 4.2% against expectations of 4.5%.

This gave a mixed view for the UK economy as on the positive side, it shows the huge rise in inflation potentially starting to tail off and drop towards the target level.

Unfortunately, the main reason for things becoming cheaper is retailers having to slash prices to entice the public to spend what little cash they have.

Overall, Sterling was pretty steady after these figures and moves were mostly as a by product of massive swings in Eurodollar.

The volatility has continued today as the uncertainty surrounding many of the worlds markets has left traders and investors with massively diverging opinions.

It seems to be “watch this space” at the moment while we wait for more news out of Europe.

Greek sovereign debts remains an ongoing issue

Positive news on the passing of further austerity measures in Greece met EU leaders meeting in Brussels yesterday evening.Greek sovereign debts remains an ongoing issueBut the speed at which the Greek budget found a gaping hole of €5.5 Billion should be as telling guide as to the spiral in which the Greek economy is stuck.

Austerity measures aimed at reducing the Greek debt burden, reduces growth and the ability to service the debt, leading to more cuts etc etc.

Leaders will no doubt be discussing how to structure an orderly restructuring of Greek debt, since any unordered default would immediately render all Greek banks insolvent and create massive uncertainty over other banks holding of Greek debt.

More worryingly still, it will put the spotlight on other PIGS- Ireland, Portugal and Spain and increase the probability of their own default or restructuring.

All of this uncertainty is feeding through to extreme Euro volatility.

The single currency is up in early trading after some positive German data at 9am assessing business conditions, and given that Asian Stock markets gains overnight we can expect America to follow suit this afternoon and the USD to slacken slightly, dragging the Euro higher into the weekend.

We are awaiting the Bank of England Financial Stability report which should not cause too much movement unless the Bank starts mentioning Euro-zone bank contagion in the event of a credit event in sovereign debt.

David Cameron announced that Britain will not be involved financially in any second bailout of Greece through the use of the ESFM as the bail out vehicle.

EU President Herman van Rompuy said funds from the ESFM “would not be part of the package”.

Sterling trades down against the Euro and broadly flat against the Dollar today.

With no Sterling related data due until next week, it will be events from the Euro-zone and US that dictate Sterling over the coming days.

Greek credit rating cut to worst in the world

Greece’s credit rating has been cut again as the risk of it’s default increases again.Greek credit rating cut to worst in the worldGreece’s recovery plans have suffered another hammer blow after Standard & Poor’s cut the country’s credit rating because of “a significantly higher likelihood of one or more defaults”.

The rating agency reduced the long term rating on Greek sovereign debt from B to CCC – only four notches above default.

It added that in its view the country’s credit outlook was “negative”- which in plain English means the odds of a default are almost certain.

The yield on 10 year bonds issued by Greece yesterday soared to over 17% and the country’s sovereign debt is now the lowest rated in the world, ranking below Ecuador, Jamaica and Grenada.

The move also effected Portuguese and Irish bonds, which are also experiencing similar problems to the Hellenic nation.

The downgrade triggered an angry response from the Greek finance ministry which claimed Standard & Poor’s decision was made on the back of “rumours and statements by representatives of the European Commission and European Central Bank”.

The statement added that the Greek government had shown “determined efforts” to “avoid at any costs” a default or restructuring of its debt repayments, as well as a “strong desire” to stay within the eurozone. It pointed to the tough fiscal strategy submitted to the Greek Parliament last week as evidence of its commitment to economic reforms.

The statement came as the euro fell again amid fears that European leaders would not be able to agree terms for Greece’s new bail-out – its second in 14 months.

Traders are alarmed by the division between Wolfgang Schaeuble, Germany’s finance minister, who wants Greek bondholders to extend the maturities on the seven year debt, and Jean-Claude Trichet, president of the ECB, who has argued that any restructuring is the same as a default.

European and international officials are scrambling to agree a plan to stem Greece’s debt crisis by the end of June- when the Greek government will again run out of money.

US Dollar is least worst currency option at present

The US Dollar has risen by around 5% from the start of the month. US Dollar is least worst currency option at presentThe driving force is a result of higher risk aversion trading and increasing uncertainties about the Eurozone periphery have provided the currency a boost, albeit with the US Dollar effectively being the best of a bad bunch.

Poorer than expected Eurozone purchasing managers indices (PMI) added to the already delicate sentiment yesterday- with greater declines than expected, although still at levels that are high in absolute terms.

The single European currency continues to sell off at present, with a softer IFO likely to provide additional reason for markets to reduce long positions on the Euro.

The EUR/USD exchange rates is now eyeing up a drop below the key 1.4000 level, as the 100 day moving average level of 1.3972 expected to be broken soon.

More significantly in terms of sentiment drivers the despair in the eurozone periphery especially Greece remains the major threat to the EUR.

Despite work from officials in Europe and Greece, rumours of debt restructuring are rife as the market is far from persuaded, as reflected in the widening bond spreads.

The Greek PM’s effort to push through austerity measures in the Greek parliament yesterday by announcing accelerated asset sale plan and EUR 6 billion in budget cuts have done little to turn market sentiment despite the fact that at the least it shows a willingness to stick to the plan in the face of growing domestic resistance.

Sterling has also slid suffering in the wake of a resurgent USD and unconfirmed reports that Moody’s ratings agency is expected to announce that is placing 14 out of 18 UK banks on review for a downgrade.

Coupled with this news the UK’s PSNB came in at £7.713 bilion against a forecast of £5.353 billion- which is the worst April reading on record.

The Treasury is blaming a hit in one-off factors and the government making headway on cutting deficit.

Greek debt restructuring pulls down euros

Standard & Poor’s has cut Greece’s credit rating by two notches to B from BB+, warning that any voluntary debt restructuring by Athens would amount to a default. Greek debt restructuring pulls down eurosThis puts Greece rating six notches into junk territory after European politicians acknowledged that Greece’s £97 billion rescue package was insufficient and that more help would be needed.

The news pushed Eurodollar lower hitting an intraday low of 1.4255 before recovering slightly overnight.

Euro Debt markets reacted accordingly with the yield on Greek two year notes hitting a record 25.5% and Irish two year yields over 12%, however perhaps most worrying were Spanish CDS prices which gapped noticeably higher on the day.

With Eurozone economic data light on the ground today, expect the market’s focus to remain on Greece and developments in the peripheral European debt markets.

Sterling traded with a heavy tone for most of the day, falling on weak housing market data released from Halifax showing that house prices in the UK in April fell the most in seven months.

Overnight, we’ve seen some positive economic data with BRC retail sales figures posting their biggest increase in five years. US Markets regained some of the losses from last week amid a slow domestic news day.

There is little in the way of market moving data today and so we can expect risk flows to play a part in volatility.

Tomorrow sees the release of the Bank of England’s quarterly inflation report which could well pressure the pound further if the central bank maintains its dovish outlook.

Central banks are center of attention for wise money

The surprisingly better than expected US unemployment figures on Friday will likely switch the debate further towards a hawkish stance within the Fed. Central banks are center of attention for wise moneyThis week there is little to match the significance of jobs numbers in terms of market moving data this week. However, all eyes will be on the raft of Fed speakers over coming days coupled with the minutes of the FOMC meeting.

The Fed speakers under the spot light are Lockhart, Evans, Bernanke, Kocherlakota, Plosser and Lacker. Within this list only Lockhart and Lacker are non-voters.

Given the focus on latest Fed comments Currency markets will be searching for anything that points towards a broader Fed stance towards a quicker hike to interest rates and/or reduction in the Fed’s balance sheet.

Regardless the Greenback may struggle to make much progress ahead of an expected European Central Bank (ECB) rate hike of 25 basis point on Thursday.

However as ever much will depend on the press statement. If the ECB simply reiterates market prospects of around 75bps of policy rate hikes this year the single European Currency will struggle to remain strong.

In addition it maybe likely that once the ECB meeting is out of the way the EUR may finally be vulnerable to pressure related to continuing peripheral tensions.

The results of the Irish bank stress tests last week, and political vacuum in Portugal ahead of elections set for June 5 were well absorbed by the EUR but it is debatable whether the division between increasing peripheral bond spreads and the EUR can carry on- evidence that finally the currency maybe regaining its mantle of funding currency.

It remains too early for the Bank of England to increase rates regardless of growing inflation readings and MPC members are expected to wait for the next months Inflation Report before a crucial shift in favour a rate rise.

At this point, members will have to tackle with the issue that economic data remains somewhat restrained as suggested in the weaker than expected March manufacturing PMI data.