London trading session update before the New York open

Sep 16 • Mind The Gap • 2129 Views • Comments Off on London trading session update before the New York open

Larry Summers steps back from Fed chair nomination, equities markets rally and dollar falls

The news that Larry Summers does not want to be considered as the replacement for Ben Bernanke as the chairman of the USA Fed, once Bernanke retires in January 2014, caused many of the global equity indices and equity index futures to spike, whilst the dollar has slumped. The overall opinion of analysts and market commentators was that Summers would have been too hawk-ish, analysts are expecting that any replacement would be far more dove-ish and accommodating in relation to asset purchasing by the central bank and monetary easing etc.

European consumer and retail inflation has come in as predicted; CPI at 1.3% and core CPI at 1.1%. Italy has posted its latest export/import data and the news is very encouraging, exports have jumped 3%, whilst imports have reduced by 0.3%. The really encouraging news is that exports to non EU countries have risen by over 3.5%. This news will offer encouragement to Mario Draghi who is delivering his latest speech regarding the state of the EU finances. Mario Draghi’s Berlin speech is called “Europe and the Euro – A Family Affair”, and the key theme is that Europe needs growth to underpin its delicate recovery;

“The recovery is only in its infancy. The economy remains fragile. And unemployment is still far too high. My main message is that we have made significant progress on the first step, stabilising the euro area. But there is still work to do to transform this achievement into higher growth and employment. Strengthening the euro area through sustainable policies, higher competitiveness and stronger common institutions is therefore our priority for today.

“One way to regain competitiveness quickly is to address the numerator in unit labour costs – nominal wages. Another, longer-term approach is to increase the denominator – to achieve higher productivity. In my view, in the euro area today we need both.

“On the first count, there are already some encouraging signs of rebalancing in the euro area in terms of cost competitiveness. Thanks in part to the structural reforms introduced in several countries, relative costs are adjusting where they had become misaligned in the past.

“Thanks to their consolidation efforts so far, the primary fiscal deficit for the euro area has fallen from 3.5% of GDP in 2009 to around 0.5% in 2012. This is projected to turn into a primary surplus from 2014 onwards.

“This improvement in public finances has helped send a signal to investors that government debt levels will stabilise and then fall in the future. This has been crucial in reassuring markets about debt sustainability. But the average public debt level in the euro area is still very high, at around 95% of GDP. This means that consolidation efforts need to be maintained in the years to come.”

Bond yields drop for UK borrowing

The ‘Summers’ effect’ has hit the debt markets, Britain’s borrowing costs have dropped this morning. The yield on 10-year gilts has dropped to 2.86%, from 2.91% on Friday night, due to traders rushing to buy UK debt (pushing up the price, and thus lowering the interest rate on the bond). US Treasuries have also strengthened, driving down the yields on America’s 10-year bonds by 8 basis points to 2.812%, from 2.9% on Friday.

Market snapshot at 10:30am UK time

The Nikkei index closed up 0.12%, the Hang Seng closed up 1.47%, whilst the CSI closed down 0.42%. The ASX 200 closed up 0.54%. European markets have reacted positively to the news that Summers has withdrawn from the race to be the next chairman, whilst some of the relief rally will also be attributable to the accommodation reached regarding the Syrian crisis. Many European indices have reached five year highs.

The STOXX index is up 0.92, the UK FTSE is up 0.89%, the CAC is up 0.88%, the DAX up 1.17%. The Istanbul exchange is up 2.78% and the Athens exchange is down 0.13%.

The positive news regarding the Syrian crisis caused WTI oil to fall by 0.99% to 107.14 per barrel, whilst Brent crude has fallen by 1.75%. NYMEX natural is down 0.08% to $3.67 per therm. COMEX gold is up 0.68% at $1317.5 per ounce, whilst silver on COMEX is up 0.87% at $21.91 per ounce.

Looking towards the USA New York open the DJIA equity index futures is up 1.09% at 15478, the SPX is up 1.14% and the NASDAQ equity index future is up 1.08%.

Forex focus

The dollar dropped 0.5 percent to $1.3364 per euro early in the London trading session after touching $1.3382, the weakest level seen since Aug 28th. The U.S. currency fell 0.6 percent to 98.81 yen after reaching 98.46, the least level witnessed since Sept 2nd. The euro was little changed at 132.06 yen.

Australia’s dollar climbed by 1.1 percent to 93.48 U.S. cents and gained 0.5 percent to 92.31 yen. New Zealand’s currency rose 0.9 percent to 82.07 cents and was up 0.3 percent at 81.05 yen. The dollar fell to a two-week low versus the euro as the exit of former Treasury Secretary Lawrence Summers from the race to lead the Federal Reserve damped bets for an early halt to expansionary monetary policy.

The dollar has depreciated by 1.3 percent during the past week, the biggest decline amongst the ten most developed-nation currencies tracked by Bloomberg’s Correlation Weighted Indexes. The yen is down 0.3 percent and the euro has lost 0.3 percent.

The pound climbed 0.4 percent to $1.5941 in the London session after rising to $1.5958, the highest level seen since Jan 18th. Sterling was little changed at 83.72 pence per euro after appreciating to 83.57 pence on Sept 13th, the strongest level since Jan. 18th.

The pound has risen 6.9 percent during the past six months, the best performance amongst the ten developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes. The dollar has gained 0.8 percent and the euro advanced 3.1 percent. The U.K. currency has strengthened at least 1 percent against all 31 of its most-traded peers in the past six months, setting a four-year high versus the yen.