Pound up after bank holiday weekend

After the 3 day weekend, the markets have opened up after fully digesting the Fed Jackson Hole meeting with the Pound increasing over the bank holiday weekend.

After the 3 day weekend, the markets have opened up after fully digesting the Fed Jackson Hole meeting with the Pound increasing over the bank holiday weekend.

Janet Yellen’s suggestion that a rate rise is still likely has seen the FTSE strengthen again by 0.3%, but oil has stated to come under renewed pressure.

With a hike now potentially in September a real possibility, Brent Crude found itself trading below $50 per barrel once more and with that, the price for those who do not hold US Dollars as their base currency will find all oil based products more expensive to purchase.

Number of investments coming into UK at year high

The number of investments that come into the UK was at a year high, up a big 11%.

A number of the 116,000 jobs created were said to have been created from overseas investments, also showing the UK as the most appealing region in Europe to do business.

A number of reasons were given as to why the UK attracts so well, such as the English language (spoken globally), fair tax and EU membership, which could now become a hindering block after Article 50 is triggered.

Today’s key data is mixed in terms of geography, with UK Mortgage Approvals, Fed’s Fischer speaking on Bloomberg and German Consumer Price Index out today which may move the markets.

US GDP contraction shocks wise money markets

The US economy shrank 0.1% in the fourth quarter of 2012 for the first time since the end of the recession in 2009.US GDP contraction shocks wise money marketsIf you contrast the contraction of 0.1% against the 3.1% growth in the third quarter then you can get some grasp of the sharpness of the fall and the surprise in the data.

The fall in GDP is being attributed to steep cuts in defence spending and weather related hits to consumer activity.

The FOMC in their monthly interest rate meeting were fairly upbeat about the US economy and suggested that the stall in growth was temporary as they left their $85 billion bond buying stimulus plan in place.

The US Dollar has continued to lose ground in the forex markets and the euro has now hit a 14 month high against the USD.

Interestingly the weak data which would normally lead to USD strength as a safe haven instead led to Euro gains.

Elsewhere we have actually had some good news for a change from the UK economy with GfK January consumer confidence coming in at an improved -26 against an expected -28, not quite a surge in optimism but at least ahead of expectations.

The euro has held good levels after mixed economic data with weak German retail sales and lower French Producer Prices countered by a fall in German unemployment.

In other news, the credit ratings agency S&P have noted that China amongst others may be spending too much after they ranked economies on their vulnerability to an investment led collapse.

China is accompanied by Brazil, Australia and South Africa who have invested heavily in recent years to supply China with natural resources.

USA almost in the clear

USA politicians moved one step closer to approving an eleventh hour deal to raise the country’s debt ceiling and avoid the prospect of a default that would throw the global markets into chaos. USA almost in the clearMember of the House of Representatives voted 269-161 in favour of the proposed plan, which will lift the debt ceiling by $2.4 trillion before the end of the year through a programme of spending cuts that politicians have spent weeks debating.

The bill will still pass through the Senate who must approve it before tonight’s midnight deadline.

The Dollar gained through much of yesterdays trading and continued those gains today as investors garnered confidence from the announcement.

Sterling suffered yesterday with the shock manufacturing figure showing a contraction in the industry and the lowest recording for over 2 years.

The markets were expecting a figure around 51.00, but the actual was 49.10, a very disappointing number showing the UK economy is still struggling to grow.

The Pound has received a small boost this morning with the construction sector beating estimates at 53.50.

The Euro continues to get knocked around with the manic movements in Eurodollar.

This is set to continue with the ongoing debt problems in the Eurozone combined with the announcements from the US.

US Dollar v euro exchange rates- which is the weakest link?

Currency exchange money markets continue to dither between the US debt ceiling issue and eurozone peripheral debt worries.US Dollar v euro exchange rates- which is the weakest link?In spite of a lack of agreement to raise the debt ceiling, with House Republicans failing to back a bid by House speak Boehner, the Greenback in fact strengthened towards the end of last week as eurozone peripheral issues came back under scrutiny.

The strength of the Dollar to the lack of progress in raising the debt ceiling is remarkable and exposes the single European currency even uglier than the US Dollar, in many investors’ eyes.

The key drivers for the week ahead will depend on the scale of any boost in the debt ceiling and additional budget deficit reduction methods.

If a deal is reached ahead of the August 2 deadline it is not clear that the Dollar and risk currencies will enjoy a rally unless the debt ceiling deal is a solid and major one.

Given the limited market follow through, following the recent deal to provide Greece with a second bailout, the EUR remains wholly unable to capitalise on the USD’s woes.

A reminder that all is not well was the fact that Moody’s ratings agency placed Spain’s credit ratings on review for possible downgrade while reports that the Spanish parliament will be dissolved on September 26 for early elections on November 20 will hardly help attitude for the EUR.

Compounding the Spanish news doubts that the EFSF bailout fund will be ready to lend to Greece by the next tranche deadline in mid-September and whether Spain and Italy will participate, have grown.

The potential danger for the USD this week is not only that there is disappointing result to the debt ceiling discussions, but also that there is a weak outcome to the US July jobs report.

An increase of around 100k in payrolls, with the unemployment rate remaining at 9.2%, will fixate market attention on weak growth and if this increases expectations for a fresh round of Fed asset purchases the USD could be left rather vulnerable.

So far today we have had UK CPI manufacturing which came in at a disappointing 49.1 down from revised 51.4 in June and some way below median forecast of 51.0.

Sterling now currently sits at 1.6417 from a high of 1.6475 and 1.1390 against the Euro from a high of 1.1450….bad start to the week for the Pound.

US Greenback continues to suffer on debt fears

The Dollar has made consistent losses this week and the continued stalemate on the subject of extending the US debt ceiling, the greater the problem for the currency. US Greenback continues to suffer on debt fearsWithout a doubt, it appears that the Greenback is taking the brunt of the pressure compared to other assets.

For example, although US treasury yields have edged higher, there appears no sense of panic in US bond markets.

Failure to agree on the debt ceiling does not naturally mean a debt default however it will increase the chances should an agreement not be reached in the weeks after.

Nevertheless, the impact on US bonds maybe countered by the increased potential for QE3 or safe haven flows in the event that no agreement is reached.

The worst case scenario for the USD remains no agreement on the debt ceiling ahead of the August 2 deadline but a short term solution that appears to be favoured by some in the US Congress may not be that much better as it would effectively be seen as ‘kicking the can down the road’.

The better than expected package to help resolve Greece’s debt problems last week dealt a blow to the USD as the almost perfect negative relationship between the USD and EUR over recent months.

Furthermore, the debt ceiling deadlock is making matters worse.

However, the situation can change very quickly and should officials surprise us all and find agreement the USD could rally sharply.

Things are not looking great for the EUR as most of its gains have mostly come by courtesy of a weaker USD rather than positive EUR sentiment.

The news hardly bodes well for the EUR, with data in the Eurozone looking somewhat downbeat.

For example, the Belgian July business confidence indicator dropped to a 9-month low in line with the weaker than expected outcome of the July German IFO survey last week.

In addition, there are still several questions about last week’s second Greek bailout agreement and contagion containment measures including parliamentary approvals and lack of enlargement of the EFSF which could keep markets nervous until there are clear signs that implementation is taking place successfully.

A clear indication that the EU agreement has failed to inspire as much confidence as officials had hoped for is the lack of traction in terms of narrowing peripheral bond spreads, with the exception of Greece.

This partly reflects a renewed ‘risk off’ tone to markets but this is not the sole reason.

Which is the weakest link- the euro or the Dollar?

The race to be the biggest problem child currency has once again been set in motion as last Friday’s weak Non-farm payroll, which exposed a measly 18k increase in June payrolls and an increase in the unemployment rate, actually left the Greenback relatively unperturbed.Which is the weakest link- the euro or the Dollar?Where as closer to home, Europe’s problems outweighed the negative impact of more signs of a weak US economy, leaving the euro as a bigger loser.

The Dollar’s toughness was even more remarkable bearing in mind the drop in US bond yields in the wake of the data.

Nevertheless, the news over the weekend that talks over the US budget deficit and debt ceiling broke down will leave US Dollar bulls with an unpleasant taste in their mouth.

Should weak jobs recovery hurt enthusiasm for the Dollar?

To the extent that it may raise expectations of the need for additional Fed asset purchases, it may prove to be a barrier for the Dollar.

However, there is adequate reason to look for a bounce back in growth in 2011 and in any case the Fed has set the hurdle at a high level for more quantitative easing (QE).

Fed Chairman Bernanke’s response and outlook will be under scrutiny at his semi-annual testimony before the House (Wed) although he will likely stick to the script in terms of US recovery hopes for next year.

This should leave the USD with no great concerns.

There will be plenty of other data releases this week to chew on including trade data, retail sales, CPI and PPI inflation and consumer confidence as well as the kick off to the Q2 earnings season.

Fresh worries in Europe, this time with contagion spreading to Italy left the EUR in bad shape and powerless to take advantage of on the soft US jobs report.

In Italy high debt levels, weak growth, political friction and banking concerns are acting in unity.

The fact that there is unlikely to be a final agreement on second Greek bailout package at today’s Euro group meeting will act as a further weight on the EUR.

Wise Money markets price in the odds of a Greek yes vote to euro

The Wise Money markets have made its move and has priced in a positive resolution for today’s crucial Greek vote on austerity due at 12:00 GMT.Wise Money markets price in the odds of a Greek yes vote to euroRisky assets and the euro have been subsequently bought back into and EUR/USD has pushed back up from 1.41 to 1.44 on the prospect of a yes vote.

The market is clearly in a situation of buying the rumour and a sell of the fact could be on the cards – the yes vote is not a foregone conclusion as the socialist ruling party only have a tiny majority of six in 300 seat parliament.

It is squeaky bum time for Greece and the Euro- for now.

Even in the light of today’s critical vote it is the Pound and not the euro which looks as though it has been through 12 rounds.

The beleaguered Pound has fallen 8.9% in the last year and covets the accolade of second worst performing currency among 10 developed market currencies behind the US Dollar according to Bloomberg.

So why is the pound so weak?

Well in a nutshell we have recently seen GDP dip further against forecasts, mortgage approvals are set to remain near a 4 month low in May (data due at 9:30) and interest rates are set to remain low.

However the nail in the coffin is the retail sector which is struggling and consumer confidence is waning fast- the Asda CFO summed it up well today in the Telegraph stating that British consumers are starting to ration as fear and uncertainty grips consumers.

This certainly challenges the government’s austerity plans- if this mood prevails, plan A will certainly fail as growth will be hamstrung by a lack of consumer appetite and with no plan B the UK could be in for a rough ride.

Euro starts the week well

Following Friday’s risk positive afternoon and news over the weekend that argues for further buying of the currency, the Euro was the big winner.
Euro starts the week wellThe Dollar on the other hand has lost significant ground to both the single currency and Sterling after a sharply weaker than expected US employment report.

The data disappointed investors hoping for signs of a recovery in the US economy.

Perception of the immediate situation relating to Greece improved following reports that the next tranche of aid scheduled for payment by the IMF/EU over the coming weeks was now likely to go ahead.

This is allied to the view that whilst official confirmation of a new deal for Greece is unlikely before the ECOFIN summit, a deal will have been agreed by then. It is therefore unlikely that traders will find reasons to muster a Dollar recovery over the next couple of days ahead of the ECB meeting on Thursday.

Over the weekend, the Portuguese electorate got the chance to express its concern over the austerity measures introduced by Jose Socrates’ government as part of the EU/IMF bail out deal.

Voters accordingly threw the Socialist party out, opting for a majority coalition government made up of the Social Democrats (40%) and the conservative Democratic and Social Centre Party (11%).

This perversely now leaves the Greek PM, Mr Papandreou as the only surviving premier of the countries that have had to seek financial assistance from the EU/IMF.

Risk is the Word

The Greenback lost some ground as risk appetite increased but markets remain lively as attitude switches between ‘risk on’ and ‘risk off’.Risk is the WordAs US Q1 GDP was left unchanged as jobless claims astonishingly increased together with continuing Greece worries suggests that a risk off mood may filter into markets despite positive US earnings.

Although the USD has not particularly benefited from any rise in risk aversion lately, worries about the next IMF tranche being withheld from Greece will likely play more positively for the USD.

Nonetheless, lurking in the background and helping to keep the USD restrained is the Fed’s ongoing asset purchases as QE2 remains in place until the end of June.

Moreover US data disappointment points to risks that the Fed will only slowly embark on its exit strategy.

Additionally any agreement towards extending the US debt ceiling appears to be far off, and threatens to go down to the wire all the way to August 2.

US debt markets and the USD appear to be downplaying this issue at present but it remains a clear threat to US markets.

Continuing to limit any upside in the EUR is the fact that officials and markets continue to gyrate on whether Greece will or will not restructure its debt.

Apparent divisions between the view of some officials and the ECB are adding to the confusion whilst fresh worries about the IMF withholding funding for Greece will likely keep EUR/USD capped.

Wise Money markets quietly digest latest global economic data

Yesterday we heard the particulars of recent the UK’s MPC and the US’s FOMC meetings and we also had euro ratings action from Moody’s, with very little resulting movement.Wise Money markets quietly digest latest global economic dataThe Pound dropped slightly following poorer than expected UK employment data but only lost ground following hard fought gains from Monday and Tuesday.

The main points from May’s MPC meeting were as expected and indicated no change in voting from April’s outcome.

However, the meat on the bones was always going to be the interesting facet, and so it proved.

The minutes suggest that the majority of members on the committee remain in no hurry to raise interest rates and although it is apparent that a wide division in views still exists, it is obvious that more members remain concerned about the downside risks to growth than about the dangers of stubbornly high inflation.

Moreover with the most hawkish member, Andrew Sentance, now set to be replaced by Ben Broadhurst, who seems to have a more balanced view on the economy, the make-up of the MPC would seem to be moving even further towards unchanged policy.

As a result, interest rates in the UK appear set to remain at the current low levels until the Autumn at least, with the November meeting now touted as the favourite for a tightening of policy.

The FOMC minutes, like those of the MPC, produced nothing earth shattering as the Fed Chairman, Ben Bernanke, had already prepared the market for a less dovish stance in his first press conference although again, the detail, when you dug down, was more revealing.

Markets were surprised by the extent of the discussions concerning exit strategies with officials outlining several guiding principals for the process of normalising monetary policy.

It was also clear that the majority of voting members favour raising interest rates prior to any asset sales as a means of tightening liquidity conditions.

Moody’s were also active, downgrading by 1-notch the credit ratings of the 6 largest Danish banks on fears of declining financial resilience.

None of this dented the Euro’s continued strength however with Asian markets preferring to focus on a report in The Times of China’s continued appetite for Eurozone sovereign debt as a means to diversify its foreign currency reserves away from the Dollar.