A Disaster of Epic Greek Proportions

August 13, 2012 By Leave a Comment

The Greek economic ‘tragoidia’ continues as Greece maintains its course of continue negative growth lasting five years now. It is incredible that a member state of the European Union can spend 5 years in a vehement recessionary state, ultimately undermining the purpose and existence of the European Union.

The Greek economy was set the impossible task of reigning in debt to a level where Austerity has squeezed the economy dry. Politicians in Greece are desperately appealing to the EU to give them grace on Austerity targets which are virtually unobtainable, especially as the economic cycle is working against them. With large amounts on the population having been employed in the government, a cut in Austerity has pushed unemployment up to almost 23%. This means that the spending power of the economy has dramatically fallen as many have little propensity to spend based on fear or a lack of income. As the economy shrinks as a result, the government have less ways to collect revenue to balance out Austerity measures. In essence, Greece can’t win and its worrying that the EU know that and don’t appear to be bother, or worse still, they can’t see that.

The effect of the Eurozone today hit Japan hard, who posted negative GDP figures based on the lack of global demand, in particular from the EU which has been one of its biggest ‘clients.’ Japan has struggled with the YEN becoming increasingly popular in risk adverse markets, the effect of which is being felt now. I can’t feel too sorry for them; the Central Bank has threatened action but hardly followed through. Talking about Central Banks, we find out what the Bank of England is likely to do next this week.

I honestly thought we would have a ‘Euro-free’ day… (JKM)

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The End of A Week That Never Really Began

August 3, 2012 By Leave a Comment

The week began with the promise of so much, particularly as Central banks had the opportunity to change the direction of the recession that has plagued the world economy. There was an expectation for the FED to undertake QE3 as an alternative to ‘Operation Twist’, however this is almost completely ruled out. Then the Bank of England and MPC chose to ignore the poor GDP figures out of the UK and elected not to extend QE or cut interest rates. Both the FED and Bank of England cited the Eurozone as the main threat to their economies and felt the most appropriate economic policy would be to urge the Eurozone to settle their situation. When the ECB stood up to make a decision on interest rates, it failed to deliver again, making a decision to not change interest rates. There is a discussion about the use of the EFSF and ESM, but with the political struggle of finding common ground between Germany and the rest of the Eurozone nations, there is little chance of anything being achieved.

Look forward to the Bank of England report as well as the ECB report in the middle of next week. Until Monday, enjoy the weekend. (JKM)

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Central Banks Continue to Disappoint… FED, ECB and Bank of England all stand with their hands behind their backs.

August 2, 2012 By Leave a Comment

Today was meant to be all fireworks and heroics from the Central Banks; the Forex market was awaiting their intervention to redirect the economy away from a deeper recession. Instead, all 3 Central Banks elected to stand with their hands behind their banks and ‘wait and see.’ I am not sure what they are all waiting to see, but now we have to wait with them.

The disappointment started yesterday evening and the FED ruled out further stimulus expansion and almost definitely ruled out QE3. There was expectation that the FED would announce further policy in conjunction with ‘Operation Twist’ which may have danced last summer, but seems to have been a non-hit on this summer’s dance floor. Instead, the FED made clear that the threat to the US economy was the Eurozone and chose to use the stage to pile the pressure on the Eurozone to act. This morning the Bank of England had its chance to act. Although the possibility of a rate cut was slim, there was expectation to see further expansions in QE. This appeared the logical decision as UK GDP has continued to decline, economic outlook is moving toward ‘poor’ and inflation continues to fall back in line – painting the perfect picture for stimulus. Instead the Bank of England decided to leave everything on hold, again believing that the Eurozone will need to settle before economic policy can be added to. The fact that the Olympics has failed to make a positive contribution to the economy is worrying as many had banked on its input, now more so that the BoE has decided to wait on watch.

So, it all came down to the decision of the ECB. The stage was set for a radical shake-up…. And in true Eurozone style all that was delivered was disappointed. The ECB and the Eurozone have great ideas on how to push down the cost of bonds, how to increase the flow of liquidity and how to win the confidence of the market. The only problem is that they have no idea how to settle their political difficulties. Whichever way the ECB and Eurozone go, they only path to settling the issues is to agree with Germany. There is talk on the restructuring of the usage of the EFSF and ESM, the truth is they are short term fixes.

Still cannot believe that the Bank of England and the FED are waiting on Europe to solve the financial crisis. *shaking head in disbelief* (JKM).

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A Whole Load of Junk in Spain’s Trunk

June 15, 2012 By Leave a Comment

It is no surprise that Spain has been downgraded again, this time down to a Baa3 rating by Moody’s. The new Spanish rating makes it just above Junk in the credit scoring system which is no surprise considering the extremely high debt vs. GDP ratio and the lack of economic strategy to deal with the Spanish crisis.

Unfortunately for Spain, they didn’t exactly ask to be in the situation they are in. The Eurozone has been torn apart by political influences at the decision-making level, which have caused divides across strategy and policy-making. The two most prevalent divides lie between whether Greece should be in the Eurozone or not and whether the European Union should consolidate debt. Needless to say, Angela Merkel is central to both debates.

Greece, already bailed out and heavily indebted to the Eurozone, are heading to the polls to elect a new government. If the Socialist party win, they may reject the EU bailout terms and thus force their exit from the Eurozone. If the Conservative party win, it is likely they will abide by the EU rules and remain part of the economic bloc. Which would be the best outcome? Of course, without hindsight, it is impossible to say. What is clear is that leaders in the Eurozone aren’t interested in being held to ransom by Greece, with Angela Merkel making it very clear that if Greece doesn’t play by the rules then EU leaders will be quite happy to support the ‘Grexit’. The second divide regards the handling of Eurozone debts. Many EU leaders and financial markets would like to see a divided European Debt, particularly in the form of a Eurobond. This may be the best option to creating some kind of financial security across the region. Angela Merkel, however, refuses, saying that it is against her parliament to agree to such measures. Instead, she stated that the time was now to build a new framework to put in place the measures that were ‘forgotten’ when the euro was created. A statement like that is unlikely to inspire much confidence!!

Looks like the German Parliament has more power than the European Union… I will leave you with that thought! (JKM)

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Mission Impossible

May 3, 2012 By Leave a Comment

Nothing about the Eurozone is normal. The concept of the European Union was far from the ordinary, the legal and political structure of the Eurozone is complicated, the economic crisis is catastrophic, the bailout value was spectacular and now the new challenge is ‘Mission Impossible’.

With Greece and Ireland both bankrupt and Spain quickly following suit, the ECB and Eurozone leaders have conceded that austerity alone will not be sustainable and that without economic growth, very little, if anything, can be achieved in the Eurozone. As part of the Greek Bailout, the EFSF was introduced as a sure-stop, provided that countries abided with self-imposed austerity targets. Well, foolishly, whilst the Eurozone went around appeasing the political powers that be, by keeping to austerity measures, they forgot to continue to push for economic growth. The result -more Eurozone countries verging on a bailout. Today Mario Draghi, head of the ECB, stated that “there is no contradiction between pursuing austerity and pushing for growth”. Discussions began last week about a ‘growth pact’ in the Eurozone, which many expect will be introduced alongside current austerity measures. It can be argued that the EFSF and Greek bailout have set the tone for much worse to come in the Eurozone.

The US economy struggled with poor data last week and a fall in manufacturing figures this week has raised the voices of the FOMC, who have sent out mixed signals as to where there is further intervention to come. There is no doubt the US economy needs growth; particularly as the unemployment figure is viewed as unsustainable without growth. The key figure tomorrow, Non-Farm Payrolls, will answer a lot of pending questions on the state of the US economy. Look for a statement from the Federal Reserve to follow the data…

It’s an impossible mission for the Eurozone, but it’s not impossible to trade the Euro. (JKM)

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Goodbye April

April 30, 2012 By Leave a Comment

In some senses reality bit home in April, with markets across the western economies shaken by bad data and a realisation that economic policy formulated over previous months may have failed.

The Eurozone agreed a bailout of Greece which formulated economic policy to maintain budgetary control by Eurozone nations. Each nation made austerity the top of their economic goals, promising to bring deficit well below current levels to prevent another ‘Greek Scenario’. The downside to this was that the Eurozone economies began to decline and falling growth figures pushed up unemployment. As resentment grew on the streets, confidence fell in the markets. Bonds became less popular and governments ended up paying more interest than was affordable. Spain has become the recent victim of the short-sighted economic policy and now the once great Eurozone economy has had its credit rating cut and has begun talking about the possibility of a bailout.

Over in the US, the economy has been sluggish and hasn’t benefited as much as one would have hoped from ‘Operation Twist’. Previously used to reasonable success, many expected this economic policy of selling short-term debt and buying long-term debt to maintain a lower cost of borrowing. Many criticised this policy of not doing enough to directly boost growth and reduce unemployment. This criticism became valid at the end of the month when US Durable Goods and GDP disappointed. Now, the FOMC are ready to stand by if needs be – but it may need something a little more substantive than ‘Operation Twist’ this time round.

The UK economy suffered a fall from grace in April. With inflation falling at a steady rate and momentum gathering along with consumer confidence, the UK economy was expecting to see out the possibility of a ‘technical recession’ by posting a positive growth figure late in April. As with all things in the current economic climate, the UK economy suffered poor GDP figures which meant the recession was alive once again. Unemployment continues to rise and the Bank of England may have been caught a little off-guard with fears that perhaps not enough consideration has been given to a ‘back-up’ plan.

The good news is that as economies move away from the winter months and towards the summer, economic activity tends to increase. However, it is likely that the ECB, the FED and the MPC will have to once again deliver a raft of policies that pack more punch than paper work.

He we go… (JKM)

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rEUcession

April 23, 2012 By Leave a Comment

The Eurozone is set to maintain its recessionary position until late in 2012 after data today showed that slumping business sentiment is likely to keep the economy dampened. The UK economy will be looking to end the discussions of the recession with GDP figures later this week.

Producer Managers Index in Europe fell from just below the mid-balance point of 49.3 down to 47.9 today as producers activity has fallen in the Eurozone again. This no doubt is the clearest of indicators that the Eurozone will again report negative growth and concede a recession. Analysts have begun to predict a prolonged negative growth (recession) until late 2012 at the earliest. In the meantime, the USD has begun to show signs of gathering strength after financial markets were sold aggressively to adjust for a pending Eurozone failure. What is more worrying for the Eurozone is that there is a pending political catastrophe. It looks as though Nikolas Sarkozy may succumb to defeat in presidential elections, with Francois Hollande looking likely to become the next French president. The worry is that Hollande is proposing that the ECB deal directly with governments in the Eurozone and take an active approach, something that Germany and Angela Merkel will clearly not allow. The thought that a dis-jointed and dis-functional Eurozone may now end up being divided by political spectrum is a major worry.

Over in the UK, murky water appears crystal clear. The UK have been battling avoiding a technical recession after ending the last quarter of 2011 with negative growth and beginning 2012 slightly slower than expected. It was fear that rising unemployment and an unexpected rise in inflation could have caused a negative growth result for the first quarter of 2012. However, strong retail sales last week buoyed by good weather (how very un-British) and panic buying of petrol may have given the British economy the jump it needed. If GDP figures on Wednesday come out positive, the sterling could gather some momentum and push forward.

Will we see a ‘Houdini like economic miracle’ on Wednesday… (JKM)

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Eurozone Heading for a Disaster

April 16, 2012 By Leave a Comment

After the Greek bailout, it was meant to be smooth sailing for the Eurozone. Deep down, however, we knew this wouldn’t be the case. Greece was a ‘pleasant’ distraction, hiding the economic mess and the real state of affairs in the Eurozone.

The first problem the Greek bailout caused was the change in the political atmosphere. We saw a change in government in several countries across the Eurozone and a further ‘rocking’ of political stability in key nations such as Germany and France. We all know how Angela Merkel has been fighting for her political existence whilst the German Parliament has been pegging her back and monitoring her every step in the Eurozone. Now there are elections in France, with Sarkozy under pressure, while dissent in Greece, Spain and other nations indicate that there may well be a new face to Eurozone politics by the time the crisis is behind us.

The second problem is what is next for Eurozone economies? After the Greek bailout, there was a self-assessed agreement of each nation to align themselves within the austerity targets. Unfortunately, austerity targets are quickest achieved by cutting down government spending, which hits the public sector the hardest. This radically accelerates unemployment, which doesn’t aid the economic situation. Whilst governments hold back on spending, growth generally tends to suffer. The result is slowing growth, rising unemployment and inflation tending to move upwards. Of course, the most significant impact comes from the fact that as Eurozone economies slide, the cost of borrowing increases, which compounds the problems of the economy and starves off liquidity.

The third problem comes from the loss of competitive advantage. Whilst the Eurozone slows down and depletes in presence, the rest of the world will take advantage. We have heard of Asia turning down the opportunity to bailout Europe and electing instead to pick up cheap European assets. Then we saw trade move towards South America, with Brazil rapidly rising up the ranks and overtaking the UK economy in size. Now not only will the Eurozone have to battle through the crisis, but they will have to develop a ‘competitive strength’, which will be hard to do once the rest of the world has moved on.

It is no surprise that China is almost ready for its new, exchange-tradable currency, the Renminbi (CNH), to be released. Restrictions have now been lowered, allowing the currency to move 1% a day. They have elected for the CNH to be based in London, not in Europe, which will come as a big blow to the European Financial Economy.

Out with the euro, in with the CNH – they did predict that Asia would rule the world. (JKM)

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It’s a Tale of the Season in the Eurozone

March 26, 2012 By Leave a Comment

Even before the dust of the Greek bailout settles, the Eurozone debt is piping up again with Spain looking slightly suspect and the Eurozone preparing a larger bailout to prevent another crisis. This will be decided in another Eurozone meeting at the end of March.

Ever since Greece dodged the bullet, Eurozone countries have come under increasing pressure to meet tight austerity budgets and avoid the requirement for further bailouts. Portugal has faced, and passed, several debt tests and other Eurozone countries have frantically been avoiding the attention of the inspectors. Germany still holds its head high above the rest of the Eurozone nations and continues to call the shots. With the need to prepare for calamities in Spain, Germany initially rejected the view to widen the financial ring fence. However, Angela Merkel has now conceded that the financial package is likely to exist in the long term and she will consider the possibility of joining the EFSF and the ESM to create a ring fence that is €740bn wide.

The German Parliament has restricted the actions of Angela Merkel in the Eurozone and all decisions of this nation will require their approval. Unfortunately, the German Parliament appears slightly concerned at the state of affairs and is fully aware of the risks of being over-involved and over-exposed to the Eurozone crisis. The bond market has already priced in the agreement to create a ‘super-ring fence’ in the Eurozone and a shortcoming of this agreement may see the market crumble around the Euro once again. The IMF and G20 will no doubt be asked to lend the support to such a move. Nations infected by contagion have been keen to see the Eurozone settle its own issues and have expressed reluctance to continue to increase their contributions. We know that the UK, China, Japan and the US are all focused on adding buoyancy to their own economies and will have little interest in handing out any more buoys.

Could this be the beginning of a Spanish summer not seen before? (JKM)

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A Day of Nothing

February 8, 2012 By Leave a Comment

So much was meant to have been done today and so much has; in the form of more meetings. The Greek Haircut debacle is apparently edging closer whilst ministers in the Eurozone have met again to finalise Austerity measures, pending another meeting.

Markets have rallied into February surprising most analysts and traders. EUR/USD reached just shy of the 1.33 level which is a new high for 2012. Many had expected the lack of decision making and direction in Greece to weaken the Euro across the board. It appears that many now believe that both Greece and the Eurozone will be restored to a safe place or alternatively that Greece will leave the Euro, and the Eurozone will continue. There is no doubt that traders haven’t priced in the possibility that things can still go wrong for the Euro, perhaps the market doesn’t view this as a viable risk.

Ministers in Greece claim to be at the final stages of agreeing new Austerity measures, which will be extremely unpopular with the people. These need to be agreed and put in place as soon as the Greek Haircut is settled, to release the much needed bailout funding. In the meantime, representatives of private debt holders have flown back with what appears to be another offer. The expectation is that agreements on both fronts will be reached shortly.

In a slightly more orderly fashion, the MPC will make an announcement tomorrow regarding interest rates and Quantitative Easing. Interest rates will inevitably remain on hold whilst we should see a monetary expansion of a further £50bn. There has been some debate and analysis of the extent of Quantitative Easing as the UK economy has shown signs of hope through falling inflation and a jump in manufacturing. This may well be the last bout of it for the year as the MPC and Bank of England will be keen to let the UK economy find its feet through steady steps and without the need for more patchwork.

A day of nothing is usually followed by a day of everything… (JKM)

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