Forex Market Commentaries - Italian Spanish Debt Crisis

How Much? – Do You Take cheques?

Oct 17 • Market Commentaries • 1625 Views • No Comments

How Much? ¿Cuánto Cuesta? Do You Take cheques? ¿Toméis Los Cheques

What can only be described as weary cynicism appears to have enveloped both the markets and market opinion. The next in a long drawn out series of macro economic meetings is scheduled for next Sunday, a summit at which the 27 EU leaders (in their sixth attempt this year) will finally attempt to draw a line under the euro zone crisis that has led to bailouts of Greece, Ireland, Portugal and is threatening Italy and Spain.

Therein lies the big question for the grand solution, “how much, and will you take a cheque?” Who’s next, in the biggest game of show and tell bagatelle, is surely a ‘contest’ between Spain and Italy. The opinion formers and solution shapers will be hoping to construct a fund, part of it virtual and to be ‘formed’ in the event of further catastrophe, that immediately deflects questions as to “who’s next” “how much” and “how long this latest fund will last”? Figures of €3 trillion have been quoted, and based on past performance that should ‘last’ four years. After weeks of debate, in German and Slovak parliaments, whilst haggling with countries such as Finland over its singular demand for collateral on Greek loans, the €440 billion European Financial Stability Facility is in place which covers the cost of Greece’s potential default which, as a subject and despite their best efforts, refuses to evaporate into the hot air generated by the policy makers.

World stocks hit a 1-1/2 month high as the euro held near a one-month high this morning after France and Germany announced over the weekend they were making good progress on the plan to resolve the euro zone’s debt crisis and recapitalize the region’s banks. However, Greece faces crucial tests this week, most of the country will be shut down by a 48-hour strike peaking on Thursday as parliament votes on a sweeping package of austerity measures demanded by international lenders in return for further support. Greece’s two main unions, representing about half the four million-strong workforce, have organised the most disruptive strikes since the crisis began two years ago, hitting food and fuel supplies, disrupting transport and leaving hospitals and other emergency services run by skeleton staff.

Prime Minister George Papandreou, in defiance of the protests, is pledging to push through the deeply unpopular package including; tax rises, pay and pension cuts, job layoffs and changes to collective pay deals. His wafer thin four-seat majority in Greece’s parliament is expected to survive although two members of his ruling PASOK party may oppose part of the bill when the vote is called, probably in two stages on Wednesday and Thursday. The strike on Wednesday and Thursday will hit public sector institutions including tax offices, state schools and airports. Banks and businesses ranging from taxis and clothes retailers to suppliers of everyday staples like bakers will close. Judges will hold indefinite stoppages, only issuing rulings on major cases. Customs officials who clear fuel refinery deliveries are holding a 24-hour strike today and will decide whether to extend their action, potentially hitting petrol supplies. A 48-hour strike by seamen, starting on Monday, has brought passenger ferries to a halt, disrupting traffic to the country’s dozens of islands.

 

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The Euro
The euro’s share of the global reserve of currencies fell to 26.7 percent at the end of June from a peak of 27.9 percent in September 2009, the month before Greece ignited the debt crisis by revealing that its previous government had understated the budget deficit according to IMF data on Sept. 30th. The pound’s share of reserves was little changed at 4.2 percent up from 4 percent at the end of last year, while the yen’s rose to 3.9 percent from 3.2 percent. Central banks and other wealth managers raised allocations to a group the IMF calls “other currencies,” which Citigroup suggests comprises equal amounts of Australian and Canadian dollars and Swedish krona, to 4.9 percent from 3 percent. Reserve managers reduced their euro holdings by an equivalent of $11 billion in the year through June, adjusting for the currency’s appreciation, according to Citigroup. Instead of euros and dollars, central banks are putting more reserves into Japan, Britain, Australia and Canada, according to Barclays Plc and Citigroup Inc. The median estimate of at least 30 analysts surveyed by Bloomberg is for the euro to weaken to $1.35 by the year end, and depreciate to 104 yen. UBS, the world’s third-largest currency trader, sees it falling to $1.20.

Global reserves were $10.1 trillion at the end of June, up from $8.16 trillion at the end of 2009, according to the IMF, which calculates data from central banks that report their currency allocations. China, whose $3.2 trillion in reserves are the world’s largest, refuse to supply currency figures. China, the largest foreign lender to the U.S., raised its holdings of Treasuries in July to the highest level in nine months. The world’s second-largest economy boosted its U.S. debt securities to $1.17 trillion as China’s trade surplus surged to the highest in more than two years.

The euro has gained 2.7 percent since the Sept. 12th low versus nine developed nation counterparts as measured by the Bloomberg Correlation Weighted Indexes, it’s 3.8 percent below its high for the year in May. Foreigners were net sellers of European equities in the past five weeks, according to Zurich-based UBS. Morgan Stanley data show that investors have had a net short, or bearish, position in the currency since September. The reports add to International Monetary Fund figures showing a drop in allocations to the euro by central banks since a 2009 peak.The amount of money investors pulled out of the region’s most-indebted nations’ bond markets this year as Greece 10-year yields rose above 20 percent was as much as twice the average of 2010, according to Bank of New York Mellon’s “iflow” data, which is used by the IMF and the Bank of Japan in their analyses.

Markets
Asia/Pacific markets made strong gains in overnight early morning trade. The Nikkei closed up 1.5%, the Hang Seng closed up 2.01% and the CSI closed up 0.5%. The ASX 200 closed up 1.66%. Europe opened in positive move and has continued in that direction, the STOXX is up 1.39%, the FTSE is up 1.08%, the CAC is up 1.4% and the DAX is up 1.64%. The SPX equity index future is currently up 0.78%. Brent crude is up $37 a barrel.

Economic Data Releases

13:30 US – Empire State Manufacturing Index October
14:15 US – Industrial Production September
14:15 US – Capacity Utilisation September

Figures from a Bloomberg survey of analysts predict a figure of -4 in comparison with a previous figure of -8.82 for the Empire State index. Figures from a Bloomberg survey of analysts predict a figure of 0.2% unchanged from the previous figure for industrial production.

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