The currency blog

The sentiment in the markets shifted again over the weekend as China commented on the Eurozone’s planned bailout package. China, which has taken even more focus lately as European leaders look towards the Eastern powerhouse to invest billions more into Europe to prop up the ailing economies and banks, have yet to confirm their position. The most recent comments stated that China will co-operate and said “a prosperous and stable Europe is important to China’s stability and development”, but it will not be the “saviour” if the indebted nations. This is likely to keep French President Nicolas Sarkozy up at night as he has been on the phone to his Chinese counterpart saying Beijing has a “major role to play” in Europe’s recovery.

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What a day! Risk was forcibly thrown on the table as markets interpreted was most  had seen as just bare bones of a European rescue plan as reason to be cheerful,  and risk assets surged throughout the European session and overnight.  Leading the way was the Euro, up two cents against the Dollar and Sterling and looking increasingly like it will continue to march higher. Not far behind the way on were the banks, which contrary to every other industry that receives a recapitalisation managed to convince the market that getting €106bn to shore up creaky balance sheets it is a good, rather than negative development. Also helping sentiment was the American GDP figure although only inline with estimates, reassured investors that the world’s largest economy is still growing, albeit at a sluggish pace.

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Eurozone leaders once again put off decisive action to the region dent problems leaving the markets to trade and rumours and comments. The crisis, which threatens to throw the world into a new recession, has been the only subject of note for traders and investors as the markets remain volatile, but over a small range. The summit, between 17 euro nations, led to the agreement that the bailout fund would be leveraged up to €1 trillion, half the €2 trillion the markets have been looking for. This agreement is only in words though and no official number or method for achieving it has been announced. The disagreements to derive over exactly how these funds will be raised and also the size of the haircut that banks and institutions will have to take on any Greek bonds they own. The IMF was said to favour a 70% cut while the owners of the bonds are struggling to get above 40%.

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Pressure was mounting on Silvio Berlusconi‘s coalition government after it failed to agree on tough new EU measures aimed at reassuring the markets that Italy’s sovereign debt is on a sustainable path. The measures include forcing the Italians to lift the pension age to 67, something that the coalition views as untouchable. The news come on the back of rumours yesterday afternoon that today’s meeting of EU leaders has been postponed, which briefly caused a Euro sell off, before the single currency bounced back after it was confirmed that the meeting would go ahead as planned. The markets are very quiet this morning, almost as if they are waiting for something. The announcement will come this evening, fingers crossed we get definitive answers on all three lines of attack, the EFSF, bank recapitalisations and Greek hair cuts so the EU gets breathing space to address the more important problem of deeper fiscal integration.

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Euro-zone politicians already had a lot on their plate this week. Bank recapitalisations look set to happen, albeit on the lower end of the scale, but both the enlargement of the bail-out fund and the size of Greek haircuts both need to be agreed by tomorrow. Large problems to overcome by themselves, but made even harder because the 17 Euro member countries seem to have annoyed the remaining 10 members of the European union outside the Euro, who for fear of being marginalised now want to be at the crucial meeting on Wednesday.

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European leaders did manage to agree on a much needed bank recapitalisation package worth €108bn over the weekend, aimed at restoring confidence on battered European lenders, but there is still no agreement on how to expand the firepower of the EFSF. Wednesday’s deadline is approaching rapidly, so German Chancellor Angela Merkel and French President Nicolas Sarkozy instead of just getting on with it, think it better to use the deadline as political ammo to force Italy into further reforms. The final pillar of the three pronged attempt to finally stem the crisis, the size and scope of haircuts of Greek debt, is also yet to be agreed. Given that two of the three pillars are still in negotiation, you might expect the uncertainty over a resolution to be Euro negative. However the single currency has started the week of the front foot pushing over 1.39 against the Dollar and we look set for stock markets around the globe to rise as well.

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