Forex Market Commentaries - Euro Rescue Plan

Taking a Knife to a Gunfight, the Trillion Euro Sticking Plaster

Oct 27 • Market Commentaries • 4147 Views • 1 Comment on Taking a Knife to a Gunfight, the Trillion Euro Sticking Plaster

Ultimately the EU ministerial roadshow had to release a plan, even if many commentators believed it to be woefully inadequate they had to be seen to be doing something. The €1 trillion combined rescue package will create the right kind of headlines through the mass media channels to ensure that Joe Public and the rest of Europe’s voters believe that the crisis is over, many informed analysts will suggest we’re simply at the end of the beginning as the overall issue of the Eurozone sovereign debt crisis has been crisis managed but not solved.

European leaders finally persuaded bondholders to take 50 percent losses on their Greek debt and boosted the firepower of the rescue fund to €1 trillion euros. Measures include the recapitalization of European banks, a bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

Nicolas Sarkozy stated that the euro region’s bailout fund will be leveraged by four to five times, and investors have agreed to voluntary write down 50 percent of Greek debt. Sarkozy is due to speak to Chinese leader Hu Jintao to ask for support from the Asian nation in the bailout effort. U.S. data to be published on Thursday may show the world’s largest economy expanded last quarter at the fastest pace this year.

Europe’s leaders summonsed the banks’ representative, Managing Director Charles Dallara of the Institute of International Finance, in order to break the deadlock to cut Greece’s debt to 120 percent of gross domestic product by 2020 from a forecast of about 170 percent next year.

Charles Dallara, the managing director of the IIF;

On behalf of the private investor community, the IIF agrees to work with Greece, euro area authorities and the IMF to develop a concrete voluntary agreement on the firm basis of a nominal discount of 50 percent on notional Greek debt held by private investors with the support of a 30 billion euro official package. The specific terms and conditions of the voluntary PSI (private sector involvement) will be agreed by all relevant parties in the coming period and implemented with immediacy and force. The structure of the new Greek claims will need to be based on terms and conditions that ensure (net present value) for investors fully consistent with a voluntary agreement.

French President Nicolas Sarkozy;

The summit allowed us to adopt the components of a global response, of an ambitious response, of a credible response to the crisis that is sweeping across the euro zone.

Herman Van Rompuy, the president of the European Council;

The leverage could be up to one trillion (euros) under certain assumptions about market conditions and investors’ responsiveness in view of economic policies. There is nothing secret in all this, it is not easy to explain but we are going to more with our available money, it is not that spectacular. Banks have been doing this for centuries, it has been their core business, with certain limits.

Damien Boey, equity strategist at Credit Swisse in Sydney.

While the headlines look good, the devil is in the details. It’s great news that they’ve managed to increase the bail-out fund to 1 trillion euros plus agree on some sort of haircut arrangement for the private investors in Greek debt. The problem is, we don’t actually know how they are planning to increase the bail-out fund size from 440 billion euros to a trillion. On top of that, there are some questions as to whether one trillion euros in itself is enough.

Stocks climbed to an eight-week high, the euro strengthened and Treasuries dropped on the news that the European leaders finally agreed on a plan to expand the bailout fund. Metals and oil led a rally in commodities. The MSCI All Country World Index gained 1.8 percent at 4:06 p.m. in Tokyo, set for the highest close since Aug. 31. Asian Pacific markets were boosted by the Eurozone news, the Nikkei closed up 2.04%, the Hang Seng closed up 3.27% and the CSI up 0.22%. The Australian index the ASX 200 closed up 2.49% the SET up 2.39%.

European markets have received a massive positive jolt due to the bailout fund news, at 10:20am GMT the STOXX is up 3.77%, the UK FTSE is up 1.97%, the CAC is up 3.80%, the DAX is up 3.58% and the main Italian bourse the MIB is up 3.81%. The SPX equity index future is up circa 1.2%, Brent crude is up $117 a barrel and gold is down $15 an ounce.


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The euro rose to a seven week high versus the dollar after the news broke that European leaders have agreed to expand a rescue fund for indebted nations and reached an accord with lenders on write downs for Greek debt. The euro appreciated above $1.40 for the first time since September. The dollar and yen fell as stocks rallied, damping demand for safer assets. The Australian dollar rose versus all of its major counterparts as commodity prices increased. Canada’s dollar rose above parity with USA dollar.

The euro had gained 0.8 percent to $1.4021 at 9:15 a.m. GMT after rising to $1.4038, the strongest level since Sept. 8. currency advanced 0.4 percent to 106.40 yen. The dollar declined 0.4 percent to 75.90 yen. The Dollar Index, which IntercontinentalExchange uses to track the U.S. currency versus those of six major U.S. trading partners, slid 0.7 percent to 75.665, after dropping to 75.595, the lowest since Sept. 8. The Australian dollar reached its highest level in almost seven weeks against the U.S. currency as investors bought higher-yielding assets. The Aussie gained 1.8 percent to $1.0588, after rising to $1.0594, the highest since Sept. 9. The Canadian dollar, the Loonie, climbed 0.8 percent to 99.66 cents versus the USA dollar. The yen has appreciated 12 percent over the past six months, the best performance among the 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes. The dollar has gained 2.8 percent and the euro has fallen 3.1 percent in the same period.

The pound fell its most in two weeks versus the euro as European Union leaders agreed to expand the rescue fund, damping demand for the perceived safety of the British currency. Sterling depreciated 0.5 percent to 87.51 pence per euro at 8:42 a.m. GMT, after falling as much as 0.7 percent, the largest decline since Oct. 10. Sterling rose 0.2 percent to $1.6009. It strengthened to $1.6042 yesterday, the highest level since Sept. 8. The pound has weakened 0.7 percent in the past month and 4.1 percent in the previous year, according to the Bloomberg Correlation-Weighted Currency Index.

Data releases to be mindful of at or shortly after NY’s opening include the following;

13:30 US – GDP Annualised 3Q
13:30 US – Personal Consumption Expenditure 3Q
13:30 US – Initial and Continuing Jobless Claims
15:00 US – Pending Home Sales September

For USA GDP figures Economists polled by Bloomberg gave a median prediction of 2.5%, from the previous release of 1.3%. The GDP Price Index was predicted to be 2.4% from 2.5% prior to this. A Bloomberg survey forecasts Initial Jobless Claims of 401K, compared with the previous figure released which was 403K. A similar survey predicts 3700K for continuing claims, compared with the previous figure of 3719K.

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