Phew it’s a scorcher.
Last week was another hugely volatile one with the usual stories continuing but with new twists and turns hitting newswires throughout the week. Central to most traders thinking was the Greece/Eurozone/IMF/Portugal/Spain/Ireland/debt story. It’s hard to know what to call it because there are so many facets to the story now. At one time, we were just concerned with whether Greece would survive until the rescue fund was constructed but now the problems that Greece has highlights are reverberating around the global financial systems.
And you have to feel for the Germans; not only has Angela Merkel committed them to €123 billion of support for the Euro stabilisation fund but they are also facing € 10 billion of domestic spending cuts per year for each year until 2016 in order to keep the German economy on track. I am sure David Cameron’s insistence that Britain would not be funding the resolution of a Eurozone problem went down with the German authorities like a concrete hang glider.
The Pound is directly affected by what happens in Europe because the UK trades with pretty well all the countries involved. However, if I may state the obvious for a moment, Britain has its own problems. The depth of the UK budget deficit was highlighted by last week’s release of figures showing an expansion of public sector debt. It came on the same day as the data showing a decline in mortgage lending and a similar decline in lending by banks to businesses. It makes you proud to be a taxpayer/owner of some of the largest banks doesn’t it. The Chancellor will lay out plans to cut £6 billion of ‘waste’ from public spending today and some of the quangos and regional bodies are very nervous. Let’s hope his plans are greeted with the positive response that last week’s scrappage of Home Information Packs received. Everyone was delighted except the estimated 3,000 people who relied on the doomed scheme for a living. Sterling had quite a good week as weakness in the Australasian currencies and the Euro gave the Pound a boost.
The Aussie and Kiwi Dollars weakened through most of last week as investors steered away from investing in higher yielding assets and; spooked by the Eurozone kerfuffle, sought safety in the US Dollar, Japanese Yen and Swiss Franc. Volatility in the Australasian currencies is assured in the days ahead as the lure of greater interest rate returns is such a temptation for investors who would love to emerge from the safety of US treasuries and buy into these currencies. However, those investors are going to have to be convinced that they don’t face increased exchange rate risk before they launch into further ‘carry trades’ as they are known. In an interesting development, many investors are borrowing in the Eurozone in order to take advantage of the 1% base rate and the potential for further euro weakness and using the funds to invest elsewhere for either a higher interest rate return and particularly into currencies which also have a greater chance of strengthening in the weeks ahead.
Before the Eurozone story dominated the headlines, the big story was when/if the Chinese authorities would let the Yuan strengthen after pressure from the US and EU over the weakness of the Yuan which they claim creates a trade imbalance. That story is no longer headline news and with the pressure off, China is unlikely to feel the need to move for the time being. This is maintaining the imbalance between the Eastern economic recovery and the Western hemisphere’s stuttering recession abatement. Clearly, this imbalance is likely to remain as long as the European problems remain and the fear exists that this has the ability to derail the recovery elsewhere.
The market is on tender hooks after reports in the weekend that the Spanish government was forced to bail out one of its biggest regional banks Cajasur. It was two years ago that Northern Rock for nationalised by the UK government and Spain’s Santander rode in like a white knight to rescue Bradford and Bingley and Alliance and Leicester. If you thought the financial crisis had ended, think again.
This week brings plenty more reasons for volatility. Today is the Whit Monday holiday in Switzerland and Germany so some of the market’s liquidity. Expect choppy volatile markets today due to the thin market liquidity and distinct lack of economic data releases.
Today’s only release of note is at 15:00pm when US April existing home sales are released.
Motorway bosses in Austria secretly hired druids to drain “negative energy” from accident black spots and reduce the number of fatal accidents - and it has worked. Harald Dirnbacher from motorway authority ASFINAG said one notorious site had gone from six deaths a year to zero, thanks to the druids.
Phew it’s a scorcher.