As the dust settles with regards to the overall Franco-German solution which will be unveiled this coming weekend (no doubt in painful bite size chunks) attention may still shift to France and the exposure of its banks, specifically in relation to Greece’s impending default which as a continual narrative appears to have disappeared from the economic news headlines recently. France is Europe’s second biggest economy and the skin its banks have in the Greece game is considerable. Not withstanding the exposure to Greece the exposure to Italy held by French banks, Europe’s third biggest economy, dwarves that of Greece.
As a consequence of these doubts yields on France’s ten year bonds climbed yesterday to the highest compared with Germany’s in almost 20 years after the Moody’s statement. The difference between the two yields expanded by up to 18 basis points to 114 basis points, the widest since 1992 based on Bloomberg generic prices.
At the end of 2010, French banks had $392.6 billion in Italian government and private debt, according to data from Basel-based Bank for International Settlements. Their combined exposure to Spain, Portugal, Ireland and Greece stood at $253.8 billion at the end of 2010, according to BIS. Italy required the European Central Bank to buy its debt in August amid a market sell off. As a potential portent French banks’ shares continued falling yesterday. BNP Paribas the largest French bank has lost 37 percent of its value year on year and Societe Generale the second largest, has lost 52 percent.
Despite the overwhelming public anger and apparent solidarity amongst its populace Greek Prime Minister George Papandreou is determined to obtain support for a further round of austerity measures in an effort to appease European leaders to help cut Greece’s debt burden by way of investors taking haircuts of more than the original 21% agreed in June/July. Papandreou stated in his latest Parliament address that the 48 hour walkout by workers in schools, hospitals, public transport and other civil service institutions beginning today “will not help Greece,” contrasting the strikers with his government’s efforts to help the country back to economic growth.
In a neat twist, whilst he firmly nails his obedience colours to the mast, witnessing G.Pap attempt to paint strikers and his fellow countrymen as the villains of the solvency crisis could be viewed as the last desperate act of a politician who as a slave to the markets has totally lost perception as to how even a 50% haircut on short term bonds currently priced at 150% is beyond salvation. Surely it is the Greek ‘yes men’ who are being held hostage, a hostage to fortune.
Greece is being held hostage by strikes and protests. This government has been fighting for two years to save the country and still has much work ahead. We will give battle and we will win.
Asian/Pacific markets experienced mixed results in early morning trade. the Nikkei closed up 0.35%, the Hang Seng closed up 1.29% and the CSI closed down 0.35%. The ASX 200 closed up 0.64% and the Thai index SET closed down 1.53%, irrespective of the economic malaise the devastating floods and the cost of clean up weighing heavily on sentiment. In European markets the STOXX is up 1.10%, the FTSE is up circa 1.0%, the CAC up 0.97% and the DAX up 1.09%. Brent crude is currently down circa $6 a barrel whilst gold is down $5 an ounce its third drop in successive days. The SPX index future is currently up circa 0.5%.
The Euro continued it’s gains from yesterday due principally to the positive news with regards to a possible crisis solution being ‘launched’ at the next EU meeting. The euro gained 0.4 percent to $1.3802 at 9:31 a.m. London time, after rising 0.1 percent yesterday. The euro appreciated 0.4 percent to 106.03 yen, and rose 0.7 percent to 1.2442 Swiss francs. The yen is virtually unchanged at 76.81 per dollar. The Dollar Index dropped 0.3 percent to 76.885. The dollar has weakened versus 12 of the 16 major counterparts. The pound extended its decline versus the euro after minutes of the Bank of England’s latest policy meeting revealed that officials voted unanimously to expand the size of their asset-purchase programme.
Sterling weakened 0.4 percent to 87.84 pence versus the euro as of 9:36 a.m. in London. Sterling has erased a 0.3 percent gain versus the yen, at 120.71 and a 0.4 percent advance versus the dollar to $1.5715.
Economic data releases that may affect market sentiment in the New York session
12:00 US – MBA Mortgage Applications
13:30 US – CPI September
13:30 US – Housing Starts September
13:30 US – Building Permits September
19:00 US – Fed’s Beige Book
How mortgage applications will affect sentiment is self explanatory and is other housing related news such as housing starts and building permits. Of more interest for US investors will be the CPI figures. The Consumer Price Index (CPI) measures the average price of a fixed basket of goods and services as might be purchased by consumers and provides a guide to the rate of inflation the CPI is the most extensively monitored inflation indicator in the US. A Bloomberg poll of analysts shows a median expectation of 0.3% (month-on-month) compared with 0.4% previously.
Another Bloomberg survey forecasts 0.2% for the figure excluding food and energy (month-on-month), unchanged from the previous release. Year on year the CPI was predicted to be 3.9% from the prior figure of 3.8%, and excluding food and energy this was forecast at 2.1% from 2.0% previously.
The Beige Book is a report entitled ‘Summary of Commentary on Current Economic Conditions by Federal Reserve District’, but is more commonly known as the Beige Book. The Beige Book is published in advance of every FOMC meeting and is used to update members of the committee with the latest economic changes. The report allows investors to see what information the FOMC members will be basing their decisions upon (and the information is unlikely to be more than two weeks old). The Beige Book does not offer insight into the FOMC members’ thoughts on the economy, it states facts regarding the economy in various regions of the US.