Concerns over Greece’s exit from the Euro Zone have come to the surface again and this has deteriorated risk appetite among investors. Although the Group of Eight (G8) leaders affirmed Greece’s status in the Euro Zone, former Greek Prime Minister Lucas Papademos id that the country is preparing to leave the 17-nation Euro Zone.
Even US stocks came under pressure in late trade yesterday on Greece’s exit worries. US Existing Home Sales increased to 4.62 million in April as against a previous rise of 4.47 million in March. Richmond Manufacturing Index declined by 10 points to 4-mark in current month from previous level of 14 in April.
In Tuesday’s trade, the US Dollar Index (DX) gained sharply and touched the highest level since January’12 as risk aversion re-emerged. News of cut in Japan’s sovereign rating to A+ from AA by Fitch Ratings along with statement by former Greek Prime Minister Lucas Papademos that Greece was preparing to exit the Euro Zone. US equities closed on a mixed note and uncertainty on the global economic front continued to loom and had an impact of higher-yielding and riskier investment assets.
As news of Greece’s exit resurfaced, the Euro came under pressure as investors moved away the currency on fears of a break-up in the currency. The DX strengthened sharply and this factor too added pressure on the Euro. Although G8 policymakers have reassured Greece’s status in the Euro, markets are also unsure about how and when will the measures have an impact. With the large base of the crisis, no measures will be able to tackle the economic problem in the near-term, and this we feel is a reality which will continue to add pressure on the currency.
European Consumer Confidence was at -19-mark in April from previous decline of 20-level a month ago.
EURUSD (1.26.73) The euro continues to decline after the OECD statements yesterday, showing worry about contagion and reducing growth estimates. The IIF said that Spanish Bank bad debts are far higher than estimated. While the IMF had harsh words for the EU. EU leaders are set to meet today for what was an informal meeting, but has turned into a Global Summit with pressure being exerted from all sides for the EU to resolve the ongoing problems.
The Sterling Pound
GBPUSD (1.5761) The OECD report yesterday also looked at the UK economic situation and advised the BoE to act quickly and decisively including additional stimulus and rate reductions. Showing concerns for the health of the UK.
Sterling hit a two-week low against the euro on Monday as investors cut some of their extreme bearish positions in the common currency, although the pound’s pull-back was expected to be limited by the gloomy outlook for the euro zone.
IMM positioning data showed net euro short positions – bets the currency would fall – hit a record high of 173,869 contracts in the week ending May 15. Investors appeared to be unwinding some of those bearish bets as the common currency crept higher, adding to euro strength.
Asian –Pacific Currency
USDJPY (79.61) JPY is down 0.5% vs the USD and weakest among the majors following a sovereign credit downgrade from Fitch, with a rating drop of one notch to A+, as the agency maintains a negative outlook. Japan is rated AA‐ /negative by S&P and Aaa / stable by Moody’s.
A focus on Japan’s deteriorating fiscal metrics may provide for further weakness in yen, reducing the impact of recent safe haven flows that had been driven by risk aversion. Additionally, ongoing interventionist rhetoric from MoF officials will leave market participants focused on USDJPY for any potential upswing.
Lastly, the BoJ will conclude a two day meeting tomorrow, and expectations for additional stimulus are mixed.
Gold (1560.75) futures have fallen for the second-consecutive day, as the US dollar’s gains after a credit downgrade of Japan and continued strain in Europe’s financial system limited demand for the metal as a currency hedge.
The most actively traded contract, for June delivery, on Tuesday fell $12.10, or 0.8 per cent, to settle at $1,576.60 a troy ounce on the Comex division of the New York Mercantile Exchange.
The latest euro-zone-debt worries have knocked the wind out of the gold market, pushing futures to a 10-month low last week as investors seeking shelter in case of a banking crisis chose the flexibility of cash or US-dollar-denominated debt.
Futures rebounded at the end of last week, tracking a pause in the US dollar’s rise, before resuming their retreat this week.
Gold traders were again cautious Tuesday ahead of a summit of European leaders set for Wednesday.
Crude Oil (91.27) prices continued to witness downside pressure and declined more than 1 percent on the Nymex yesterday as Iran agreed to provide access to United Nations nuclear inspectors. Rise in crude oil inventories monitored by the American Petroleum Institute also came in as a negative factor. The DX strengthened sharply on Tuesday and added pressure on all dollar-denominated commodities including crude oil.
Crude oil prices touched an intra-day low of $91.39/bbl and closed at $91.70/bbl in yesterday’s trading session.
As per the American Petroleum Institute (API) report last night, US crude oil inventories increased as expected by 1.5 million barrels for the week ending on 18th May 2012. Gasoline inventories gained by 4.5 million barrels and whereas distillate inventories dropped by 235,000 barrels for the same week.
The US Energy Department (EIA) is scheduled to release it weekly inventories report today and US crude oil inventories is expected to rise by 1.0 million barrels for the week ending on 18th May 2012.