Greece is one step closer to securing additional, and much needed, financial assistance this morning following a key vote in Athens last night. As protests continued in the streets, the Greek government successfully passed, all be it marginally, the 2013 budget which will yet again subject the Greek people to further tax increases and public sector wage cuts.
The Greek government has now done all that they can to ensure they are given access to further funding and a two year extension for debt repayments. The ball is now well and truly in the court of European finance ministers who will meet this evening in Brussels. Ministers will debate whether the steps that Greece has taken so far are adequate enough to warrant additional aid, the answer to which will more than likely be in the affirmative as any other outcome would essentially guarantee the bankruptcy of Greece.
With very little economic data out today and a public holiday in the US, trading volumes are likely to be substantially lower. This will be more than made up for later this week however, with key economic data being released each day, although the markets focus will almost certainly remain on Greece for the time being, at least until the next bailout tranche is agreed.
Please find a summary of this week’s economic calendar below
Public Holiday USA and Canada
EU Finance ministers meeting
07:00 German Wholesale Price Index
00:01 UK RICS Housing Price Balance
09:00 Italian Consumer Price Index
09:30 UK Consumer Price Index
09:30 UK Producer Price Index
10:00 German ZEW Survey – Economic Sentiment
10:00 EU ZEW Survey – Economic Sentiment
10:00 UK BOE Inflation Letter
09:30 UK ILO Unemployment Rate
09:30 UK Average Earnings
09:30 UK Claimant Count
10:00 EU Industrial Production
10:30 UK BOE Governor King Speech
12:30 US Retail Sales
13:30 US Producer Price Index
19:00 US FOMC Minutes
06:30 French GDP
07:00 German GDP
09:00 Italian GDP
09:00 ECB Monthly Report
10:00 EU Consumer Price Index
10:00 EU GDP
13:30 US Consumer Price Index
13:30 US Initial Jobless Claims
14:00 US Net Long-Term TIC Flows
14:15 US Industrial Production
Mark Webster 12/11/12
From one vote to another. Markets today will be bracing themselves once again for potential turmoil in the run up to another key vote, one that could cause much more movement than the US presidential election ever threatened.
We have become accustomed to leaders pleading and begging for votes over the last couple of weeks, however it is now a different leader in this position; Greek Prime Minister Antonis Samaras. As I have mentioned in previous blogs, Greece could face bankruptcy by the end of the month should they not secure further financial assistance. In order to obtain such funding the Greek government must vote to approve tough austerity measures that have been agreed with the Troika, with the first step of this process taking place today. Should this vote not be passed substantial uncertainty is likely to be seen within the markets with the Euro likely to suffer heavily as talks of a Greek exit will inevitably resurface.
The dollar is slightly down this morning against the Euro and Sterling following Barack Obamas re-election as US President. This may well be the result of market participants beginning to move away from the safety of the US dollar as uncertainty has now been reduced and risk appetite invariably increases. The Dollar has also potentially weakened based on the belief that President Obama’s win has paved the way for further monetary easing, that said however, round three of Quantitative Easing did not do much to weaken the Dollar as such policies have become to be expected and therefore are already priced in.
In comparison to the importance of the Greek austerity measures vote, there is little economic data out today of any real significance. However so far this morning EU retail sales figures have been released recording a drop of -0.8% which is slightly better than the market expectation of -1%. We will also see German Industrial Production figures released at 11:00 GMT which could move the markets slightly, however make no mistake, the key event today will be the outcome of the vote in Greece which has the potential to cause significant movement in the markets.
EU leaders will meet today for a two-day summit over plans for a single supervision mechanism and banking union and the wider issues surrounding the Eurozone crisis. In the days leading up to the summit the Euro has appreciated in a climate of calmer European stock markets and lower borrowing costs for Greece and Spain. There has also been a significant effort from Germany to argue for greater European economic and fiscal integration. EURUSD currently trades at 1.31 and EURGBP is currently trading above 0.81p (1.23). GBPUSD has also tracked EURUSD higher and trades above 1.61 on the interbank market.
Despite the relative increase in positive sentiment surrounding the Euro, it must be remembered that the summit is being held against a very dark backdrop. Greece today is braced for its twentieth general strike in two years and Spanish premier Rajoy continues to drag his feet on Spain’s bailout request. Any bailout request is now anticipated in November after the Galician and Basque parliamentary elections held on October 21st. Whilst it should be noted Catalonian parliamentary elections are due to be held on November 25th. Full Catalonian independence is unlikely to happen soon, if at all, but any Catalan struggle for greater autonomy would damage confidence, at a time when Spain needs to reassure the bond markets and fellow EU members , that the central Spanish government has its problems in hand.
No formal announcements are expected on Greece or Spain but any leaked comments could cause volatility in the Euro.
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Yesterday Wednesday 15th saw Greece’s troubles resurface. With Greece facing a deepening recession, the Greek Prime Minister is set to meet with his French, German and Luxemburg counterparts next week to persuade Eurozone leaders to extend the period of austerity from two to four years, essentially planning to reduce the Greek budget deficit by 1.5% of GDP annually compared to the previous agreement of 2.5%. Due to the slower pace of deficit reduction it is believed an additional £20bn of funding would be required to support Greece.
In the UK, yesterday’s jobs figures continued to defy the recession with unemployment down to 8% and the claimant count dropping by 5,900 in July. Minutes released by the Bank of England also confirmed that the Monetary Policy Committee was unanimous in its decision to leave the bank rate unchanged at 0.5% and to maintain its Quantitative Easing Asset Purchase Programme at its current level of £375bn. Unlike in previous meetings, the bank did not hint towards a bias of further rate cuts giving Sterling a further boost. It is expected that the Bank will gauge the impact of the new Funding for Lending Scheme and the completion of its current £50bn extension of QE in November before it makes a decision on more monetary easing. Today, UK retail sales also beat market expectations growing by 2.8% year on year.
The better than expected news from the UK, coupled with the Eurozone’s on-going troubles has pushed GBPEUR higher towards 1.28, currently trading at 1.2793 (EURGBP 0.7817).
Elsewhere the Pound trades between 1.56-1.57 against the US Dollar and the Euro trades at 1.23-1.24 against the US Dollar on the interbank market.
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The Euro has continued to come under strong selling pressure as the European Central Bank has indicated that it will not accept Greek government bonds as collateral. EURUSD has fallen from the morning high of 1.2282 to a low of 1.2144. 1.2144 representing the lowest EURUSD exchange rate since June 2010 when the rate hit a low of 1.1876.
The Pound has made strong gains against the weakening Euro hitting a high earlier of 1.2866, the highest level since October 2008. Against the US Dollar the Pound tracked the sharp falls in EURUSD with GBP falling from 1.5724 to a low of 1.5626.
The markets have responded favourably to the agreed bailout of Spain’s banks. Eurozone ministers have agreed to lend Spain as much as EUR 100bn to fund its troubled banks. Equities in Asia and Europe have opened higher and Spain’s bond yields have also dropped back below 6%, reducing the cost of funding Spain’s debt.
The Euro also opened a cent higher against the US Dollar, hitting a high earlier of 1.2668 and ¾ pence higher against the Pound hitting a high earlier of 0.8155 (GBPEUR 1.2262). The Euro has however since pared the majority of these gains and currently trades at 1.2550 against the US Dollar and 0.8075 (1.2384) against the Pound.
As the week progresses the markets focus will turn to the upcoming Greek elections on June 17th. Many are viewing the elections as a referendum on Greece’s membership of the European Monetary Union. If Greece renounces its bailout terms, Greece’s international partners could stop providing the rescue loans which the country depends on. That could lead Greece to default and potentially force Greece out of the Eurozone.
The Euro has recovered mildly ahead of Thursday’s Greek debt swap deadline. Investors have until Thursday 20:00 GMT to agree to swap their Greek bonds for new bonds worth approximately 70% less. 75% of bond holders need to accept the deal for it to pass. The European Union and the International Monetary Fund have warned that if the deal is not approved, Greece will not receive its latest bailout of €130bn, likely leading to a Greek default.
On the Interbank market the Euro currently trades at:
EURGBP 0.8360 (GBPEUR 1.1961)
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The European Central Bank has cut interest rates by 0.25% to 1.25%. The Markets will now await the ECB press conference at 13:30, possible Greek PM resignation and the on-going G20 summit.
Financial markets have responded negatively to the unfolding drama surrounding the Greek bailout, with equities and the Euro starting November under strong selling pressure.
EURGBP fell from last week’s high of 0.8830(GBPEUR 1.1325) to a low of 0.8548 (1.16986) yesterday and is currently trading around 0.8611 (1.1613).
Against the US Dollar the Euro fell from last week’s high of EURUSD 1.4247 to 1.3608 yesterday, again the Euro has pared some of its losses and EURUSD currently trades at 1.3783.
The Greek cabinet has endorsed Greek Prime Minister Papandreau’s controversial plan to hold a referendum on the EU debt rescue package and the market will now await the outcome of today’s talks between Papandreau and his French and German counterparts President Sarkozy and Chancellor Merkel ahead of Thursday and Friday’s G20 summit and Thursday’s European Central Bank interest rate decision.
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The Euro has appreciated following the EU summit deal on the Eurozone debt crisis. The agreement came after prolonged late night talks and for the time being has convinced the financial markets they have a response to the economic crisis. The deal will focus on 3 key points:
Firstly, private banks will be asked to accept a 50% loss on Greek government debt. This is expected to cut the nation’s debt load to 120% of GDP in 2020. Under current conditions, it would have grown to 180%.
Secondly, the European Financial Stability Facility (EFSF) will be leveraged four-five times and increased from €440 billion to €1 trillion.
Finally, the deal will aim to recapitalise European banks, which will be required to increase their core cash reserves to 9% by June 2012.
The Euro has appreciated back above 1.40 against the US Dollar and above 0.8760 (GBPEUR 1.1416) against the Pound. The market is likely to remain volatile and will continue to await and scrutinise the finer technical and legal detail and implementation of the agreement.