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.

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.

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.

Wise money markets cautious as eurozone recession deepens

There are concerns for global growth which have been weighing on financial markets of late. Wise money markets cautious as eurozone recession deepensThe GDP contraction from Japan has done little to ease these worries as we move in to a fairly quiet week ahead.

In the eurozone, French and German GDP figures were out this morning, showing that Germany has managed to grow ever so slightly while France has remained stagnated with 0% growth quarter on quarter.

The eurozone GDP figures showed that the region has contracted by a further 0.2% from the prior quarter.

Investor concerns for further slowdown in these areas are also bringing down sentiment, though an Italian bond auction has calmed nerves, temporarily.

News from Greece yesterday also showed that they have contracted at the highest levels since the recession began in 2008, at -6.2%.

Most of the focus will be on next month’s Troika visit to Greece where they will ascertain how to disburse the funds for the bailout, provided Greece does enough to conform with the austerity measures.

Next month will also witness Spain having a review of their banking sector to determine how much aid they would need from the EFSF.

Sterling has managed to trade at higher levels at the start of this week after crossing 1.57 in opening trade.

Inflation figures were out this morning at 2.6% which was higher than median projections that were supposed to be within the Bank of England target range of 2.3% for the month of July.

Euro snatches defeat from the jaws of victory

It would appear there has been little breathing space for European markets after the latest concerns for Spain and Greece. Euro snatches defeat from the jaws of victoryFor Spain the approval of a bank bailout has provided little support as speculation of a sovereign bailout intensifies.

Worryingly the fact that two Spanish regions have requested government aid with more potentially sitting in the wings has only acted to cement these concerns.

Over to Greece and the delay on a bailout tranche due to a failure to meet austerity targets the European Central Bank (ECB) decision not to accept Greek debt as collateral and the visit of the Troika (EC, ECB. IMF) will keep markets nervous as default fears increase.

This has certainly been reflected in the bond market with peripheral bond yields coming under increasing pressure whilst core eurozone yields have turned negative in some cases.

Spanish yields have moved above the significant 7% threshold while the euro has nose-dived versus the US Dollar and on the crosses it ever more takes on a funding currency role and makes its way towards the 1.20 level versus the Greenback.

It was a similar story against the Japanese yen which fell to 94.37 yen in Asian trade, its lowest level since November 2000.

It also dropped against the Australian and New Zealand currencies too.

Asian stock markets also fell overnight from fears that the on-going debt problems in eurozone will hurt the region’s growth.

Japan’s Nikkei 225 index fell 1.9%, South Korea’s Kospi dropped 1.8% and Australia’s ASX 200 index shed 1.7%.

As the eurozone is a key market for Asian exports and there are worries that demand from the area may decline in the near term.

At the same time, a weaker euro has also added to the woes of Asian exporters, as it makes their goods more expensive for buyers from the region.

Expectation of additional monetary stimulus, particularly in the US and China have offered some support to markets recently but this does not appear to be a long term solution so far.

Wise money markets wait on Bunderstag votes

The Bunderstag is today expected to give the green light for Angela Merkel to push ahead with the bail out of the Spanish banks.Wise money markets wait on Bunderstag votesGerman participation in the bail out is a must and the markets remain nervous about the potential for a delay on the decision, ala the decision on the ESM by the German constitutional court.

However, it is likely that the vote will be passed as only a simple majority, rather than an absolute majority.

The euro is finding some strength as we build up to the announcement, but its path today is entirely down to the result of the vote.

Eurozone data today is confined to low level Italian industrial output.

UK retail sales are also due later today.

Modest gains are expected but the effects of the extreme wet weather will undoubtedly have a real drag on the numbers.

The monthly figure is expected at 0.4%, but something closer to 0% would not be a shock.

Sterling remains in a Euro-Dollar sandwich and is unable to find any traction on the back of UK related data or news flow.

Public sector finances figures are due tomorrow; the pressure is building on the Chancellor as the economy continues to slow.

The Prime Minister has reaffirmed the Government’s commitment to fiscal austerity this morning, but it is becoming increasingly clear that ultra-lose monetary policy by itself will not get us out of the mess we are in.

The Chinese authorities cut rates alongside the ECB and BOE earlier this month, so tomorrow’s business sentiment number will be watched closely as the Chinese economy slows.

Eurogroup meeting outcome mulled by money markets

The Eurogroup meeting ended with some proposed progress through an outline for the recapitalisation of Spanish banks.  Eurogroup meeting outcome mulled by money marketsAn initial 30 billion out of the total 100 billion will be paid via Spain’s existing bailout fund by the end of July and following this Madrid will channel funds through to stricken banks.

Therefore Spain’s government debt will take an initial hit until the new system is in place via a new eurozone banking supervisor headed by the ECB.

The key question for the markets is will this be enough?

The developments in Spanish rates will be a focal point as the 10 year level hovers around the unsustainable 7% level.

The euro has managed a small recovery back over 1.23 against the USD but still looks fragile.

UK data out has seen May Industrial Production data rise sharply to +1% month on month- this is the strongest rise since March 2010.

We have seen a spike in GBP/USD by 40 pips on the news and it is good to see some progress in this area and some good news for the UK economy.