Wise money markets struggle on eurozone fears

Risk assets faded particularly in Europe as a result of new fresh political strains in Italy and Spain.Wise money markets struggle on eurozone fearsElection uncertainty in Italy increased as former PM Berlusconi plots a return and government corruption allegations in Spain hit equity markets and peripheral bonds.

Consequently the EUR/USD fell 126 points from its highest close in 14 months on Friday, hurt by comments from the French finance minister warning about the dangers of euro strength.

Poor Spanish employment data did not help matters while service sector confidence indices in the eurozone today will also stoke further concerns exposing both continued contraction for most countries and divergence in the bigger economies, namely Germany and France.

Caution will succeed in the short term as markets start to query the legitimacy of the rally in risk assets listed over recent weeks. EUR/USD downside will be limited to support around 1.3458 in the near term.

Overnight the Royla Bank of Australia decided to maintain interest rates at 3.0%, after fresh growth concerns and they see potential to ease policy further.

At the last month’s meeting, rates were cut 25 basis points to 3% mentioning fears over the Fiscal situation in the US, China growth as well as European weakness.

The Aussie rallied against the US Dollar after the statement was anticipated and was priced into the currency movements prior to release.

It was a slightly different tone in today’s statement; the Reserve Bank Governor Glenn Stevens noted that the US appeared to have evaded a fiscal contraction alongside growth in Asia steadying which provided comfort that the region was improving.

The RBA did however, make reference that the Australian Dollar was higher than expected, and that inflation at its current state would ‘afford scope to ease policy further’.

Today in the UK we have PMI Service data for the month of January, where the reading is expected to be 49.5 up from 48.9 in December.

The survey summarises the opinions of Purchase Managers on future demand and orders and therefore a view on the sector as a whole.

Therefore a higher PMI suggests that material purchases are increasing and the economic outlook is positive.

Elsewhere we have Eurozone retail sales which are expected to show a fall of -1.4% for the month of December and could be a key number for the Euro’s performance in the early session.

Spanish GDP provides some joy to Rajoy

Official figures yesterday suggested the Spanish economy shrank during the last quarter- though at a slightly slower pace of negative growth.Spanish GDP provides some joy to RajoyThe on-going issues of a growing budget deficit and property crisis have left their banks exposed to a huge pile of bad loans.

In turn, huge austerity measures in the form of spending cuts and tax rises have stifled investment and have left consumers without the money or the will to spend.

The numbers did not make pretty reading showing the economy contracted 0.3% QoQ, however this was slightly better than the expectation of 0.4% figures widely tipped by commentators.

So this number was arguably the most important release outside of the US employment data later this week as it provides a clue as to whether the Spanish PM Mariano Rajoy will seek a full blown sovereign bail out.

This number will certainly provide him with a little more breathing space for sure, however one feels that this is delaying the inevitable.

Spain will now turn to the ECB and specifically Mario Draghi to discuss a possible bond-buying programme to help ease the country’s debt problems.

The numbers have certainly boosted the euro despite slightly weaker than expected German unemployment figures with the Euro trading close to 1.30 against the US Dollar at 1.2997 at the time of writing.

Over to the US and the markets are expected to re-open this afternoon and it will be an interesting watch to see how the Greenback performs.

Despite Hurricane Sandy and what appears to close election the US Dollar has actually weakened despite uncertainty on both stories.

As ever we will be closely looking into the ADP jobs number on Thursday for guidance as to how the Non-Farm Payroll numbers will be on Friday.

All indications are pointing towards a positive number of 125,000 new jobs, following the stronger than expected GDP last week alongside better than expected Personal Consumption data on Tuesday.

Sterling has recovered from it’s early week flirt with 1.60 and is now up to 1.6112 with a quiet day of UK data ahead.

Sandy storm keeps uncertainty going

Hurricane Sandy continues to lash the east coast of America causing severe flooding and damages and leading to the decision to close the New York Stock Exchange for two consecutive days. Sandy storm keeps uncertainty goingThe full implications of the damage will be more evident at daybreak and the economic cost is poised to reach $20 billion.

The wise money markets have switched to a risk off mode as uncertainty prevails on the repercussions of Sandy and also with the US election swiftly approaching.

The US Dollar has gained across the FX markets in line with the risk off sentiment and this trend is widely expected to continue for the remainder of the week.

In other news the Bank of Japan has kept its overnight call rate unchanged, however it has expanded its asset purchase programme by Japanese Yen (JPY) 11 trillion; the asset purchase programme now totals JPY91 trillion.

The JPY has actually strengthened against the US Dollar on the news and against most of its major counterparts.

Demand for the Yen has increased with hurricane Sandy and the expansion of the programme has not led to a weaker Yen.

The BOJ would need to be much more aggressive to weaken the Yen and add some relief to the manufacturing sector.

Elsewhere Spain’s Q3 GDP came in marginally ahead of expectations at -0.3%.

Yesterday Spain’s PM Rajoy in a press conference ruled out an imminent request for a bailout which put pressure on the euro.

This morning’s slightly better GDP number will support his view that Spain does not yet require formal aid.

The Pound also slipped yesterday as the Bank of England deputy governor warned that Q4 could be weak after the upbeat Q3 data.

Momentum is now needed for the UK’s drive to recovery and future UK data snaps will come under the spotlight for signs of an on-going recovery.

Spanish credit crisis resurfaces

The wise money markets have dropped more than 1 percent globally in overnight trading as concerns over Spain and the euro economy increase.Spanish credit crisis resurfacesThis has led to the euro to fall back against the dollar to the lowest in the last 2 weeks ever since it broke the 1.30 barrier closing overnight at 1.2950.

Once again the troubled Spanish economy continued to be the major focal point as investor fears loom over the recession in the region.

Ever since Moody’s downgraded the 5 regions including Catalunya, the 10 yr yields rose 13bps to 5.62 percent.

GDP figures from the region also came in poorly as it showed the economy shrank by 0.4% in the third quarter reinstating fears that the recession will inevitably last until the end of 2012.

However, the bond auction saw Spain sell €3.53 billion worth of short term 3 yr debt.

Investors had priced in the fact that a Spanish bailout request was inevitable, but the reluctance to ask for further aid by Spain has sent the markets into fear resulting in the euro facing weakness.

From the US markets, poor corporate earnings provided the catalyst for a general move away from riskier assets.

This brought about early weakness in the dollar however it did manage to gain some strength on the back of poor news from Spain.

Corporate earnings in the UK continued to frustrate investors as UK Stocks tumbled the most in almost a month.

We expect third quarter GDP figures from the UK tomorrow and the bleak outlook is driving most investors towards the Greenback.

This has prompted a slump in Sterling to close yesterday below the psychological 1.60 level.

Bank of England governor Mervyn King, in a speech in Cardiff insisted that he is ready to inject further stimulus if the recovery falters. Investors continue to take direction from broader equity markets which have plagued risk sentiment for the time being.

Credit rating Moody’s downgrades Spanish regions

Moody’s the credit rating agency has cut the debt ratings of five Spanish regions, following the decision to keep its rating on Spain at one level above junk last week.Credit rating Moody's downgrades Spanish regionsThe areas included: Andalucia, Extremadura, Castilla-La Mancha, Catalunya and Murcia who have seen their ratings dropped by one or two notches thanks to “very limited cash reserves… and their significant reliance on short-term credit lines to fund their operating needs”, according to Moody’s.

Eurozone debt rose to another record high according to official figures from Brussels’ yesterday.  Overall the sizes of deficits were reduced but countries were still adding billions of euros to their debt piles.

The level moved to 87.3 per cent of GDP within the Eurozone, up from 85.4 per cent in 2010, and 70.2 per cent back in 2008.

The extent of Eurozone states’ shortfalls reduced somewhat to a combined level of 4.1 per cent of GDP, from 6.2 per cent in 2010 – however this still meant an extra €390.7 billion government debt.

Elsewhere the broader European Union area, only six countries saw their level of debt as a percentage of GDP fall from 2010 to 2011, while 21 saw it worsen.

In spite of Chancellor George Osborne promising a reduction in government spending, the UK’s shortfall continued to be one of the largest in Europe.

Only Ireland, Greece and Spain logged a greater annual deficit that the UK .

Compare this with the  powerhouse economy Germany, which dropped its budget deficit less than 1% of GDP in 2011 from 4.1 per cent in 2010 and its debt fell to 80.5 per cent of GDP from 82.5 per cent.

Finally, EU members Sweden, Hungary and Estonia succeeded to stop the trend and record budget surpluses in 2011, even with the on-going economic decline across most of the euro region.

This morning, Sterling temporarily dropped below the key psychological level of 1.60 dropping to 1.5996.

The Pound’s movements will be interesting to watch on the run up to the much anticipated GDP figure which comes out on Thursday which should prove the UK is officially out of recession.

The figure will be flattered by the automatic rebound from the lost working day due to the Queen’s Diamond Jubilee in June and the addition of Olympic ticket sales.

The ONS has estimated that the extra bank holiday wiped 0.5pc off growth in the second quarter and the ticket sales will add 0.2pc to growth in the third quarter.

EU summit centre of attention

As the EU summit gets under way all eyes will be on how European leaders respond to the challenges facing Europe.EU summit centre of attentionThe aim of the summit will be to focus a drive for a more unified political and economic block as opposed to fire-fighting from one crisis to the next.

As we stand the market is awaiting news on a sovereign bailout request from Spain or at least a credit line to be put in place to ease on-going credit concerns.

With this expectation and positive talk from EU politicians ahead of the EU summit the euro is gaining.

EUR/USD has once again pushed back over 1.30 and is trading at the moment at 1.3125.

However as we stand Spain is still reluctant to request a bailout and the decision rests with them, it is a catch 22 as the recent fall in Spain’s cost of borrowing actually eases the pressure for a formal request.

From the UK we have also had September Retail Sales which came in better than expected.

So the mood is upbeat so far today as we wait to see if Europe can follow through with the good momentum.

With hope on positive news to come from the EU summit and better economic indicators from China the markets are experiencing a move back into risk.

Asian equities are higher after Chinese GDP increased in Q3 and we also saw good economic activity indicators.

In addition to support the move into risk we had upbeat US housing data and confirmation the Moody’s the credit ratings agency decision to maintain Spain’s sovereign investment credit rating.

Spain credit rating downgraded again

The woes for Spain continue to surface with Standard & Poor’s cutting its credit rating by two notches to ‘BBB-‘ which is only one notch above junk status.Spain credit rating downgraded againIn a press statement released last night S&P said ‘The negative outlook on the long-term rating reflects our view of the significant risks to Spain’s economic growth and budgetary performance, and the lack of a clear direction in Eurozone policy’.

The result of the downgrade could start to show once again in an increase in the cost of borrowing levels for the country putting further pressure on Spain to officially ask for a bailout from the ESM.

Greece is also in the spotlight as lenders negotiate with the Greek government over new budget cuts in advance of agreement on a 130 billion euro tranche required.

Comments by IMF officials suggest that the fund will seek commitments from European policy makers to help Greece in a variety of ways and provide more time.

The renewed uncertainty now surrounding Spain and Greece however is weighing on the euro which is down in the last two days.

Over to the US and the Fed beige book was released last night concluding that activity ‘expanded modestly’ last month supported with improvements in housing and auto sales.

The US economy is still not firing into life but is at least showing some positives which are not significant enough to detract from the QE programme.

The US Dollar has gained this week as Europe falls back into the spotlight reducing the appetite for risk.

The focus today will be on Europe as the market responds further reaction to the Spain downgrade as we move closer to the EU summit later this month

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.