Weekly Review… Don’t tell the Euro but Greece is not over yet

I just can’t leave it alone can I. While markets have basked in the comfort that the Greek deal was finally done helping the Euro to have it’s best week for a long time it seems that we are merely awaiting the next hick-up. Tensions between the IMF and Germany in particular roll on. The nub of the problem is that the IMF want Europe to pledge more money to the support funds (EFSF and ESF ) while the main lender, Germany is not so much dragging heals as refusing point blank.

Indeed far from any new pledge one German cabinet minister Hans-Peter Friedrich told Der Spiegel magazine that Greece’s chances of restoring its financial health would be greater outside the Euro. How dare he speak the truth!

The IMF decision on Greek bailout participation may be some time coming and perhaps this argument might stop the Euro rally or so this commentator hopes.
Last week was not just about the Euro in forex markets. No the Yen shared equal billing in the spotlight and was the biggest mover. At least on fundamentals it makes more sense and warrants some comment.

Yen No Zen Then

The Japanese yen continued its fall last week with the USD/JPY advancing more than 2.1% by the close of trade on Friday. The yen’s decline has been seen across all of its major counterparts ,off by 4.74% against the Swiss franc, 4.38% against the euro, 2.36% against the New Zealand$ (Kiwi), and 2.29% against Sterling (GBP).
The Yen’s weakness has been brought about by a combination of events. Risk on as we all like to say, or firmer equities and commodities which is what it means. This has coincided with the Japanese announcement of a further Yen 10 trillion (that’s about US $ 125 billion ) and the ongoing talk of intervention from the Bank of Japan BOJ.Finally with US Treasury yields on the up ( the mirror image of the risk-on move) all the puzzle pieces were there for Yen weakness.
While I believe that further ahead we will see the Japanese currency weaker its worth noting we have come a long way very quickly and I would be staggered if some kind of correction wasn’t upon us soon.

Euro
EUR/USD had a weekly close over the 100 day moving average (1.3300) and a test of the longer term downtrend channel around 1.3600 is quite a possibility. The LTRO (Long Term Refinancing Operation) to be announced on Wednesday will be a focus of market attention . However,its not clear on which way forex markets will jump whatever amount is involved. Last time we were all surprised by the huge € 489 billion the banks took. This time anywhere between 250 and 750 is being muted although it may even be higher. Should we be encouraged if its a huge number again. Well the Eurozone bond markets will think so as banks will carry on supporting their own sovereign bonds. The wonder is how the ECB will wean banks off it and what will all those Euros sloshing about mean. It seems the European version of QE has not yet led forex markets to punish the currency as it has with the US and recently Japan. Like the Yen the Euro is a little stretched and will react either from current levels or 1% higher.

The commodity price move and most importantly Oil have tended to drag the US currency down. With Euro based Oil prices not that far from an all time peak it is the last thing that struggling euro zone countries need. Whatever the short term throws up the diversification of fortunes within the Euro block will continue to widen. Greece is not wanted in the Euro zone by Germany for sure. Maybe the time they have bought will enable a plan B i.e. Greek exit to be planned. Many including me believe it could be managed with the Greeks being helped to keep their banks and therefore the country afloat. They would emerge much quicker than the current plan from what can only be called a Depression not recession. Likewise Portugal Spain and Italy will suffer more with higher oil prices.

Beyond this we have Greek election in April and French in May both more likely to destabilise the currency rather than help it. As yet markets are not focussing ,preferring to indulge in the comfort of Greek solvency….for a week or so.

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