Weekly review….. Euro fight back but jury out on next move as Greek talks stall

It seems the forex market is in a battle ground as far as EUR/USD goes. It is challenging the upper end of its recent channel but could not really manage a decisive break or close above the EUR/USD 1.2950 level. The price action since lasts weeks Standard & Poor’s downgrades has been Euro positive. Euro zone bond markets have been holding up well ( ECB money channelled through the banks mind you), equities have enjoyed a solid start to the New Year and US data at least continues to be supportive for risk.
As I said Friday EUR/USD bears may be tested further if we break higher, up near 1.3300 cannot be ruled out but I would be looking to sell there up to 100%, all in as you might say. There seems to have been good 2 way business from sovereigns but undoubtedly some profit taking from shorts,many of whom will have good profits.
One of the game changers last week was the new IMF initiative to raise more funds. It remains to be seen if the United States back it. There response so far has been pretty cool. Indeed the IMF is courting controversy. Ms Lagarde the French head of the IMF cannot in anyway be seen as a neutral in this. Having been a French minister she seems to be running a crusade to save the Euro, hardly what the IMF mandate is about. She has all the hallmarks of someone who will go on to stand in a French presidential election, presuming she does not self destruct like here predecessor. In any event its all a bit to Europe orientated. Their stance over Greece looks very strange, admitting things are ´dia´ with no real structural reforms and the downward spiral continuing but apparently happy to splash the cash still.
The Monti government in Italy will be unveiling its plans for structural reforms in the Labour market, which is finally to be applauded. The crucial points here are the response of unions. No Italian prime minister has been able to take them on but maybe this time it will be different baring in mind the economic situation. Of course the fruit from any changes will be years away, while the pain is immediate. Unions will want something on the growth side if they agree and its difficult to see what that might be.
Mr Sarkozy must be mighty relieved that the French downgrade has caused no wobble in bond markets and he too is talking of some major labour market reforms as he consults the unions. Brave man ahead of the election maybe, but perhaps it will be a master stroke. For sure the socialists might not look credible if they appose them much as in the UK where the Labour party have been forced to change tack on fiscal policy because of their policies lacked credibility.
So it may be that Euro bears will have to wait.The reality check for sure will be economic data from southern Mediterranean countries. As much as any individual can gauge anything the signs here in Spain point to some very poor economic figures. Starting from unemployment levels of 23% as they go into recession must be unheard of in this day and age

On to Greece where market participants will have been expecting an agreement on its debt swap deal this weekend.Latest reports suggest that representatives from private creditors have taken a time out and that the talks will not resume for a few days. While this may not be anything more sinister than last minute fine tuning of the interest paid and a deal will happen next week it could unsettle markets on Monday.

In currency markets one indicator seems still to be Euro bearish. The EUR/CHF has stayed unmoved under 1.2100 close to the 1.2000 peg and certainly no talk of raising it at the moment. It points to a continuing flow of funds away from European countries into the safety of Switzerland . Portugal which reached its 2012 targets not least by taking funds from its pension pot is thought to be next for a rescheduling quite possible followed by Ireland. And by the way just 2 weeks ago the Irish pm was on TV stating Ireland would not accept a financial transaction tax if the UK was not going too. Just another reason for them to clash with the French.

All this goes to show that despite completing austerity packages rubber stamped by everyone the upshot is failure.If more is prescribed how long before the stoic citizens cry enough. Ratings agency Fitch this week pronounced that a solution to Europe’s problems was technically and politically beyond reach, a conclusion it made after the December summit. That remains the key and as we have seen over the last 2 years the Euro zone problems may seem to come and go but in reality they are not being solved because it is 10 years too late. That the eurozone may be fixed in the next 10 years is going to be too long to wait.

Headlines

• Greece.Latest (Sunday) news points to suspension of talks without agreement. May unsettle markets on Monday but will happen next week.
• EUR/USD remains at crucial level 1.2945 at the top of its recent downtrend channel.
• European banks continue to support their domestic bond markets. All smoke and mirrors but ECB money is finding its way to fund governments
• Italian leader Monti to unveil the first real labour reforms. How will Italian unions react
• US housing data improves ( inventories of unsold homes falls to lowest since 2005)
• US Republican nomination just got interesting.Newt Gingrich wins South Carolina making it a 2 rather than 1 horse race

By the way how is your Iranian riyal position. Since October the US$/RIYAL has fallen to 18,000 from 10,500 . No change in the trend on that one either

Weekly review… Standard & Poor’s Friday 13th Part 1

As if it was some horror show Standard & Poor’s finally put markets out of the misery with numerous euro zone sovereign ratings cuts. France loses its hallowed triple A as does Austria ( France now AA+) .Perhaps of more significance was the group cut by 2 notches of which Italy ( now BBB) and Spain ( now A) are the largest borrowers.
Although the announcement came after the close of markets much had been leaked in trading time. While equities were lower and EUR/USD was back under 1.2700 it was no rout. Indeed it could be an error to expect a bigger sell -off on Monday certainly not on this news. Its been priced in already I would say.
What might be more worrying was the breakdown in Greek rescheduling talks. The rumblings there seem to point to perhaps the beginning of the end for Greece within the Euro.Provided enough of a back stop can be provided for them it may well happen sooner rather than later. Indeed prolonging it is now doing more harm than good.
The downgrade if Italy makes more of a splash I feel. There bond issuance program is an horrific spectre this year and a drop in status just adds to their troubles.
Anyway I have been looking at some of the euro zone countries so this fits in nicely

Italy
Earlier in the week ratings agency Fitch put off any cuts but was keen to point out that Italy remains the key problem within the euro zone. They noted that 1.5% growth and bond yields 1.5% above Germany would keep them solvent.Neither are within the remotest possibility with the spread against German bonds circulating around 5%
For all the austerity measures more than 20 billion will be eaten up in additional interest payments on new debt this year (€440 Billion) unless things change.
Italy lives beyond its means. A recent report into public sector wages, the Giovanni report was inconclusive but then again the very people who stand to lose most produced that report. Just look at Italian politicians who stand way at the top of Europe’s political pay league at €16,000 a month. France is 2nd on 13,500 and Spain way down at 4630 a month. Thus far cuts in expenditure while welcomed are not addressing the big problem of repealing labour laws. What’s more it seems that no one in Italy has the strength to take on the unions once and for all. This together with a tax collection system that is being exposed daily for letting citizens get away with murder when it comes to income tax contributions.So with the prospect of recession, falling tax revenues, higher interest payments, why should investors buy Italian bonds.
This weeks auction may have been ok but can Italian banks sustain buying all through the year and frankly at these levels of interest Italy cannot continue to be solvent.

Spain
Spain appears a little better off than Italy as bond yield near 5% show , purely on the amount of debt they have. They too had a better bond auction but once again this is Spanish banks buying Spanish government debt. What’s more the Spanish banks remain the real problem. Deleveraging is leaving no money for lending to the wider economy. Unemployment at 23% looks like its going to go up too. I am a great believer in seeing for yourself. When I arrived back at Barcelona airport on Monday the car parking company I use had gone bust ( Got my car but no keys so maybe I was lucky). All around where I live shops are closing. We wonder if in a few years we will just be left with the Chinese stores selling everything (Chinese) and they would appear to be the only buyers or renters of commercial property. Empty apartments are numerous as they are all over Spain. Every business you know of is complaining at the fall in spending. If it is a poor summer for tourists then this could be the last straw for many more businesses.

So we need a miracle to get back on track and that as we know seems unlikely from the ECB or Germans who now control the situation. The downgrades may well affect the ability of the EFSF (European Finance & Stability Fund) to raise funds respectable levels. They after all have Ireland Portugal and Greece to look after at the moment.
The Euro should probably not be sold next week. It is still a little oversold and as I said this could be a classic sell the rumour buy the fact job. Stock markets have started the year well and they will need to be watched. A general risk sell-off will not help the Euro but I still feel there is one good bounce left in it. Further down the road the US QE (Quantative easing) argument seems to be gaining momentum and you get the feeling the Federal Reserve will do it just because it shows they care.

One final thing. I do believe that the debt problem in the euro zone could be ended very quickly. As the citizens of Greece ,Italy and Spain have enjoyed so many years of their own false accounting paying in many cases derisory levels of tax I say let them, bail out their governments. Their pension money should be seized and used to fund debts. The IMF was designed to bail out the needy countries not poor governments from rich countries who’s residents paid inadequate taxes.Why should other EU countries whose residents pay their taxes subsidise those who don’t pay. Time to stand up Angela and tell them you pay not us. If the citizens of Italy thought they might lose their savings if they did not pay the correct taxes then that might spur them to do so. Bailouts for these are obscene and I do hope the Chinese or Indians do nothing to help.
On a political note I see Marie Le Pens National front lies just 2% behind Mr Sarkozy. and just 7% behind the socialists. OH what fun if she surges in the poles. It could be another Joan of Arc moment. Eric Cantona unfortunately has less chance of making the second round