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The Dollar has made consistent losses this week and the continued stalemate on the subject of extending the US debt ceiling, the greater the problem for the currency. Without a doubt, it appears that the Greenback is taking the brunt of the pressure compared to other assets. For example, although US treasury yields have edged higher, there appears no sense of panic in US bond markets.
UK GDP figures were this morning expected to show anaemic growth between April and June and rumours in the market suggested we may even see a flat or negative number. But buy the rumour sell the fact works again as the number has come in only slightly worse than estimates at 0.7%. Cable is up 70 pips against the Dollar and around 50 against the Euro on the news. David Cameron set the scene yesterday for a disappointing number by warning that Britain’s road to recovery “will be a difficult one” and disagreed with Vince Cable who called for further quantitative easing by the Bank of England. If the economy begins to falter again what will the coalition do to kick start it, if they have no money? Further easing at the Bank of England looks unlikely, with only Adam Posen on the MPC currently voting for it. And the fiscal cupboard is bare according to the Chancellor so a reasonably positive figure keeps Georges street cred high and unblocks a bit of the pressure that had been building over the last few weeks after a string on disappointing numbers.
Moody’s downgraded Greece to Ca from Caa1 and there is only 1 more notch to go before the rating hits the rock bottom. This has coincided with a statement from the Institute of International Finance over the weekend which implied that they see the probability of a Greek default at virtually 100%. This follows last week’s announcement from the EU of a second package of assistance for Greece which, upon reflection over the weekend, doesn’t appear to have any substance in the markets.
July saw the presentation of the findings of the EBA (European Banking Authority) stress test – an analysis of the state of health of banks across the European continent.
Subjecting the banking system to a ‘medical’ is a good idea at the best of times, but much more so when times are tough and we’re all still trying to escape from the clutches of a nasty credit crisis. The recent exercise, executed on a European-wide scale, was therefore an important one, designed to check up on the state of Europe’s major banks and instil much-needed investor confidence in the continent’s financial institutions.
It appears as though the EU ministers’ main concern was to come up with something, anything, that would settle the markets and effectively ring-fence Greece so that contagion of debt concerns did not occur. The summit therefore did not disappoint with an agreed Euro 109 billion bailout emerging for Greece and statements that the European Financial Stability Fund would potentially be able to purchase sovereign debt in the secondary market and also have the ability to recapitalise Eurozone banks should the need arise. In addition, private sector involvement in the bail-out was agreed with banks offering Greece longer maturities at improved rates on existing debt, to the tune of up to Euro 50 billion. All very nice, although it is still not really clear how the latter is going to work and probably more important, how these changes will be viewed by the ratings agencies. I feel that the EU hierarchy has already privately accepted that some degree of selective default will be forthcoming – the severity of default assessment will be all-important.
The Bank of England minutes yesterday presented a cautious, dovish outlook for the British economy with inflation expected to peak over the coming months (do we still believe the bank when it makes these pronouncements?) putting further pressure on household incomes. The market has interpreted the minutes along the same lines as the past few, with the Bank now not expected to raise rates until the final quarter of the year. Playing on the BoE’s mind will be the downgrading of UK growth estimates, with the economy now forecast to grow at just 1.3% in 2011. It looks like the Rogoff & Reinhart description of the aftermath of financial crises - sluggish growth for an extended period - is far more accurate than the market initially gave it credit for. Data this morning was mildly positive, with Sterling up slightly on the back of better than expected retails sales data.
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