Are The Eurozone's issues returning by stealth?
Despite investors experiencing parabolically rising equities market indices over recent months, many of the issues that brought the Eurozone to its economic knees during recent years have not disappeared or been dealt with, they've simply been air brushed from the narrative landscape. Therefore any discussion has been neatly avoided by huge swathes of the mainstream media's financial press…
The members of the inglorious PIIGS, who were dealt with early and as such were regarded as the "poster boys" for the austerity experiment, have ultimately failed to repair their damaged economic framework. Both Portugal and Ireland are once again creaking at the seams in their attempts to keep their listing ships afloat and given the damaged cargo they've been forced to take on board that hardly comes as a surprise. If growth was the only answer to climbing out of the hole they'd both dug, then taking away one of the cornerstones and the tools of growth, for example, an expanding workforce paying tax receipts, suggests that the blunt instrument of austerity was never likely to succeed.
Greece was back as a major discussion last week, the troika visited to examine the (supposed) improvements Greece had made in order that it could receive its next tranche of the bailout cash agreed as part of its austerity measures. The examination proved positive and despite the persistent rumours from German newsprint that there would be a €10 billion hole discovered in the finances in Autumn, the accusation was played down by a compliant media and the troika moved on.
Portugal may need a fresh bailout in 2014
Portugal has also been a concern for the economic powers that be in Europe over recent weeks due to the initial implosion of its coalition government. However, a clumsily put together series of sticking plasters has held the current government together. Portuguese government debt has risen in value this morning, as investors welcomed the decision not to call early elections in Portugal.
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This has pushed the interest rate, or yield, on Portuguese 10-year bonds down to 6.84% from 6.92% on Friday. Further from the 7% implied danger zone – where a county is effectively priced out of the markets. By not calling for early elections, fears for Portugal's immediate future have been dampened down. However, its chances of returning to the financial markets in 2014 for another bailout are now looking odds on. Without a unity government, it will be difficult to push through any additional austerity measures that may be needed to keep Portugal's financial programme on track. Portugal's initial bailout was circa €78 billion, it will be fascinating to witness just how large the financial engineering, or the re-structure will be, once the inevitable occurs in 2014.
High impact news events
Today is an unusually slow day for high impact news events that could affect market sentiment. Only existing home sales in the USA are flagging up as high impact. The prediction from the analysts polled is that the data will show a projected annual rise from 5.18 million units to 5.27 million units sold, in keeping with the increased activity in the housing market. However, certain metrics missed their predictions last week; such as new housing starts and permits, therefore this number could have the capacity to shock.
Market snapshot at 10:30 AM (UK time)
European bourses have been positive in the London morning session, this optimism was carried forward from the overnight session where the Nikkei closed up 0.47%, the Hang Seng closed up 0.25% and the CSI 200 closed up 0.53%.
STOXX is up 0.45%, the UK FTSE 100 is up 0.14%, CAC up 0.29%, DAX up 0.31%, IBEX up 0.56%, MIB UP 0.73%. The Portuguese main market is the current outlier – up 2.21% in early trade. Athens is down 0.67%. The DJIA equity index future is currently up 0.09% suggesting a marginally positive opening on Wall Street. The Nasdaq future index is currently up 0.26%.
Spot gold is currently up sharply by 1.44% currently priced at $1314.70 per ounce. Silver is up 1.94% at $19.89 per ounce. WTI oil is up 0.44% at $108.34 per barrel, whilst NYMEX nat gas is priced at $3.74 down 1.35%.
Focus on forex
Yen has risen versus its major trading peers for the first time in four days after Japan’s ruling party failed to win an independent majority in upper-house elections as Prime Minister Shinzo Abe seeks to revamp economic policy.
The dollar has weakened versus the majority of its sixteen major counterparts. PIMCO, Pacific Investment Management Co.’s Bill Gross, stated that he expected the Federal Reserve to continue with its monetary easing programme until 2016 at the earliest. Australia’s dollar climbed in the overnight session after officials in China made announcements early in the weekend aimed at scrapping rules constraining bank lending. The commercial lending floor is now determined by investment and clearing banks, not by govt policy.
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Yen strengthened 0.6 percent to 99.99 per dollar early in the London session after gaining as much as 1 percent. Japan’s currency rose 0.6 percent to 131.52 per euro. The greenback dropped 0.1 percent to $1.3156 per euro.
The Australian dollar gained 0.3 percent to 91.99 U.S. cents late in Sydney, after climbing 1.4 percent last week. It slipped 0.3 percent to 92.01 yen. New Zealand’s currency was little changed at 79.18 U.S. cents, following a 1.8 percent advance in the five days ended July 19th, the highest gain witnessed since the period through to June 14th. It lost 0.6 percent to 79.18 yen. Traders are setting a 75 percent chance that the RBA policy makers will lower the central bank’s benchmark rate by 25 basis points to 2.5 percent at their next meeting on Aug. 6th, according to the interest-rate swaps data compiled by Bloomberg.
The yen has weakened ten percent this year, the biggest decline amongst the ten developed-market currencies tracked by the Bloomberg Correlation-Weighted Index. The dollar has appreciated 5.1 percent and the euro has advanced 4.8 percent.
Swiss National Bank (SNBN) President Thomas Jordan has stated that he has no intention to change (or scrap) the franc 'ceiling' of 1.20 versus the euro, a ceiling that has now been in place since September 2011. Jordan said on July 20th in Moscow, where he attended a meeting of Group of 20 finance chiefs;
“We will maintain our current policy for as long as necessary. This monetary policy stance is needed to act within our mandate.”
The franc has slumped 2.3 percent versus the euro this year as the fiscal crisis in the 17-nation currency union retreats. It traded at 1.2364 versus the euro early in the European morning trading session.
The pound was little changed at $1.5286 in the London trading session. The currency climbed to $1.5297 earlier today, the strongest level since July 3rd. Sterling was at 86.09 pence per euro after appreciating to 85.90 pence on July 19th.