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European markets bask in light of FOMC taper and rally in early trade, as overnight EU ministers reached an agreement on banking union

Dec 19 • Mind The Gap • 1428 Views • No Comments

shutterstock_130099706Whilst attention was focused on the Fed’s monetary easing taper last night, European finance ministers reached a crucial deal on banking union, ahead of their European summit today and tomorrow. Important breakthroughs were finally made in the early hours of this morning. EU ministers agreed a broad agreement for a banking union agency and a €55bn fund to shut down troubled banks as soon as the European Central Bank begins to police them next year. European leaders, who will gather in Brussels and will sign off on it and the final touches will be made in negotiations with the European Parliament next year.

“The final pillar for the banking union has been achieved,” Germany’s Finance Minister Wolfgang Schäuble told the assembled journalists.

The positive news regarding banking union was supported by the euro area’s extremely positive data on its balance of payments printed this morning. The area has created a surplus of $208 billion, close on double 2012 surplus of €109 billion and in stark contrast to the USA’s projected $400 billion deficit for the year.

For months analysts have spoken regarding the USA QE3 being a drip that central bankers were reluctant to take away from the patient on the critical list. It therefore took many by surprise that the markets failed to last night on the news that the Fed was finally tapering, but with hindsight it shouldn’t have. There were perhaps three reasons why the equity markets didn’t crash.

  1. At $10bn, the taper was considered moderate. If the Fed continued cutting at that rate, it wouldn’t stop buying bonds until late 2014.
  2. The Fed has confirmed that it would change the rate if conditions deteriorate.
  3. The Fed has indicated that interest rates will still remain at record lows for more than another year.

UK Retail Sales, November 2013

Year-on-year estimates of the quantity bought in the retail industry continue to show growth. In November 2013, the quantity bought increased by 2.0% compared with November 2012. The underlying pattern in the data as suggested by the three month on three month movement remains flat due to a contraction in the quantity bought in food stores and petrol stations offsetting growth in non-food stores and non-store retailing.

RBA bulletin report on business investment

Business investment in Australia has reached 18 per cent of output in the second half of 2012, its highest share in over 50 years. This share has since declined and is expected to continue to decline, although by how much and over what period is unclear.

Euro area balance of payments in October 2013

The seasonally adjusted current account of the euro area recorded a surplus of €21.8 billion in October 2013. This reflected surpluses for goods (€17.0 billion), services (€9.4 billion) and income (€4.7 billion), which were partly offset by a deficit for current transfers (€9.4 billion). The seasonally adjusted 12-month cumulated current account for the period ending in October 2013 recorded a surplus of €208.3 billion (2.2% of euro area GDP), compared with a surplus of €109.8 billion (1.2% of euro area GDP) for the 12-month period up to October 2012.

Swiss Economic upturn also extending to the export industry, prospects of lower unemployment

The economic situation for Switzerland has continued to brighten over the autumn months. The anticipated positive upturn in the export industry appears to have been confirmed. Further increasing exports and consequently a broader based economic expansion are expected, since the domestic economy, which has held up well since the financial crisis, should remain robust. Providing the international economy continues on a gradual path of recovery there are good prospects for a strengthening economic upturn in Switzerland over the next two years. Following the solid GDP growth of 1.9% the Expert Group expects growth to accelerate to 2.3% in 2014 and 2.7% 2015. In the labour market this is also likely to be reflected by lower unemployment.

Market snapshot at 10:00 am UK time

The ASX 200 closed up 2.08% in the overnight session, the CSI 300 closed down 1.05%, the Hang Seng closed down 1.10%, whilst the Nikkei closed up 1.74%. In early European trade the euro STOXX is up 1.94%, CAC up 1.79%, DAX up 1.76%, FTSE up 1.09%. The DJIA equity index future is currently down 0.04%, SPX future down 0.12% with the NASDAQ future down 0.11%, all three futures suggesting that USA markets will open down on New York’s open.

COMEX gold has fallen sharply, currently down by 1.81% at $1212.60 per ounce, with silver on COMEX down 3.26% at $19.40 per ounce.

WTI for January delivery, which expires Thursday, was at $97.83 a barrel, up 3 cents, in electronic trading on the New York Mercantile Exchange mid-afternoon Singapore time. It climbed 58 cents to $97.80 yesterday, the highest settlement since Dec. 10th. The more-active February contract gained 1 cent to $98.07. The volume of all futures traded was about 51 percent below the 100-day average.

Forex focus

The U.S. Dollar Index, which tracks the greenback versus its ten 10 major peers, added 0.1 percent to 1,021.96 early in London. The U.S. currency appreciated 0.1 percent to $1.3675 per euro.

The yen rallied 0.4 percent to 142.20 per euro after touching 142.90 yesterday, the weakest level since October 2008. It strengthened 0.3 percent to 103.99 per dollar following a 1.6 percent tumble yesterday, the most since Aug. 1st.

The dollar climbed versus most of 16 major counterparts after the Federal Reserve decided to slow stimulus that’s seen to have debased the U.S. currency.

The Australian and New Zealand dollars fell versus most major peers due to fears that the Fed will continue to dial back bond purchases that have buoyed assets prices globally. The Aussie declined 0.1 percent to 88.52 U.S. cents, while New Zealand’s currency fell 0.6 percent to 81.87 U.S. cents.

The pound was little changed at 83.57 pence per euro early London time after surging 1.4 percent yesterday, the biggest increase since October 2011. It earlier advanced to 83.39 pence, the strongest level since Dec. 5th. The U.K. currency was at $1.6379 after rising to $1.6484 yesterday, the highest since August 2011. The pound climbed to the strongest level in two weeks against the euro before a report economists said will show U.K. retail sales increased in November.

Bonds

The benchmark 10-year yield was little changed at 2.88 percent early in London. The price of the 2.75 percent note due in November 2023 was 98 7/8. The yield jumped six basis points, or 0.06 percentage point, yesterday, the biggest increase since Nov. 20th. Treasuries held at the cheapest versus their international counterparts in six years after the Federal Reserve announced plans to reduce debt purchases.

 
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