Sterling / Euro
The Pound traded within a narrow downward range yesterday ahead of today’s Pubic Sector Borrowing Requirement figures and next week’s emergency budget.
The PSBR will almost certainly highlight the huge task facing the 6 week old coalition government in its attempts to reduce the gargantuan budget deficit and thus preserve the UK’s AAA credit rating.
After the overnight low’s seen immediately after Wednesday night’s Mansion House speech by Chancellor Osborne and Bank of England Governor Mervyn King, the pound steadied on the back of better than expected Retail Sales figures for May. The headline figures which include auto fuel sales rose + 0.6% month to month. After a particularly volatile first quarter, when retail sales fell by 2.2%, the performance for the second quarter of 2010 looks materially better.
Ahead of next week’s emergency budget, in a survey of markets, the Bank of England warned that widespread fear over the possible collapse of a sovereign debtor, including Greece and Portugal, had sparked a mass of bets on a 20 per cent fall in the FTSE 100.
The warning coincides with calculations from the Bank for International Settlements (BIS) showing that Britain has major exposure to the Irish and Spanish banking systems, which many fear could be at risk in the next round of the financial crisis.
The Bank of England used its Quarterly Bulletin to warn that markets were under increased strain following the International Monetary Fund and European Commission’s bail-out of Greece.
It said that investors had fled into safe haven assets, including Treasury bonds, gold and, to some surprise, UK government bonds.
However, it pointed out that the number of investors betting on a 20 per cent fall in the FTSE 100 index, based on their purchase of options connected to such a scenario, had risen from below 5 per cent to about 13 per cent in the past month alone.
Although this is below the 25 per cent level around the time of the Lehman implosion, the rate of increase is similar.
Share prices have been hit by the fears surrounding sovereign debt in recent weeks.
Some analysts fear problems surrounding government bonds could trigger a repeat of Lehman-style events.
The BIS used its own Quarterly Report to point out that, although the strain had worsened throughout the international banking system, banks’ balance sheets were slightly healthier than in the early stages of the subprime mortgage crisis that led to the Lehman collapse.
However, it also pointed out that various countries in the euro area were particularly exposed to each other – both in terms of sovereign and private debt. Banks headquartered in Britain had larger claims on Ireland ($230 billion, £158 billion) than banks based in any other country. Britain has a $150 billion (£103 billion) exposure to Spain.
Investor confidence has been further shaken by the decline in the fortunes of BP, responsible for £1 in every £6 of dividends paid in the UK which has seen over £58 billion wiped off its share value since mid April.
To cap a disastrous week for the company, following CEO Hayward’s 8 hour grilling by Congress yesterday in Washington, BP has now been warned by Russian President Mr. Medvedev. Mr. Medvedev stopped short of saying the disaster would prompt a review of Russia’s partnership with BP, but he said: “This is a wake-up call.”
Standard and Poor’s yesterday cut the company’s credit rating, and warned that further downgrades may follow.
BP’s cost to date are $1.8bn, including the cost of the spill response, containment, relief well drilling, grants to the Gulf states, claims paid, and federal costs. Repeated attempts to cap the leak have failed.
David Wilton, a Partner at restructuring firm BTG Mesirow, predicted BP’s liabilities could reach £63bn, but played down fears that the company could collapse, observing that the payments will be spread over a long period of time.
US politicians have shown no signs of letting up an onslaught against the company, following the lead set by Barack Obama who has compared the disaster to the 9/11 terrorist attacks.
In Congress, Mr. Hayward faced a barrage of criticism for failing to ignore warnings signs before the fatal rig explosion.
European Union leaders tried to calm the jittery money markets yesterday by promising to cut their countries’ bulging deficits and subject their banks to urgent “stress tests” to prevent another financial crisis.
An EU summit in Brussels agreed that 25 banks in Europe would undergo “stress tests” by national financial regulators by next month. They include four in Britain – HSBC, the Royal Bank of Scotland, Barclays and Lloyds – but those most at risk are likely to be smaller institutions in Spain and Germany.
Jose Manuel Barroso, the president of the European Commission, welcomed the decision to make the “stress tests” public. “This should reassure investors by either lifting unfounded suspicion or by dealing with the remaining problems that may exist,” he said. “If state intervention is needed, this will be examined in a timely manner under the Community rules.”
A further sign of market nerves of what may lie ahead is Gold reaching a new high of USD$1,252 per troy oz in heavy trading yesterday.
Sterling / US Dollar
The dollar took a hit after a rise in jobless claims, weaker-than-expected manufacturing data and a big drop in consumer prices on Thursday prompted investors to scale back expectations of a U.S. Federal Reserve interest rate hike.
The dollar index was at 85.57, down 0.1 percent after brushing a one-month low at 85.491. Technically, it looked vulnerable after it broke through support at 85.85, with the next key level seen in the 85.13 area, its May 21 low.
Sterling hit a one-month high against the dollar.
“A number of currency pairs are at a critical juncture near range highs,” analysts at RBC Capital Markets said in a note. “Will they respect the range, or will they see technical breakouts? In this regard, the key level to watch is the dollar index, which needs to hold above 85.00 to prevent a larger liquidation of stale longs.”
EUR/USD
The euro held at three-week highs on Friday, on track for its second successive week of gains, while the dollar appeared vulnerable to further losses after falling below a key chart level.
The dollar fell after a slew of below-forecast U.S. economic data, which helped push U.S. Treasuries yields to their lowest in a week.
The euro held gains near $1.24 as investors shed short positions after solid demand at Spanish government bond auctions the previous day, easing concerns about Spain’s debt-servicing abilities and boosting sentiment for riskier assets.
“Financial system concerns have eased, and some players are re-establishing carry trades, seeking higher-yielding assets,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. The euro rose as far as $1.2414 on trading platform EBS. By 0733 GMT, it was up 0.1 percent at $1.2387.
The single currency has gained more than 2 percent so far this week, pulling further away from a four-year low of $1.1876 struck on June 7.
“The euro remains upside corrective and on track to test the $1.2445 2009 low and inter-year pivot,” technical analysts at Commerzbank said. “This together with the 38.2 percent retracement of the move down from April represents our initial corrective target.”
European leaders agreed on Thursday to publish details of stress tests showing the financial health of individual banks next month and to toughen budget rules to restore confidence in their currency union.
Some in the market said the release of stress tests would boost investor trust in European banks but others were concerned they could reveal fragility in the sector and hurt the euro.
Data Released 18th June
GER 07:00 – PPI (May)
ITL 19:00 – Industrial orders (April)
U.K 09:30 – PSBR (May)
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