Market Review – 12/07/2010 21:43 GMTEuro falls on concerns over European banks’ refinancing problemsThe single currency fell sharply in Asia on Monday and penetrated Friday’s low of 1.2609 to 1.2587 on refinancing concerns over European banks. Later, although renewed selling at 1.2609 pushed the euro to an intra-day low of 1.2550 in European morning on speculation that stress tests would fail to assure investors’ confidence over Europe’s banking system, the pair staged a recovery on short-covering and traded sideways in NY afternoon.
The single currency was pressured as investors were worried about government over-indebtedness in Greece, Spain, Ireland and other parts of Europe as many banks had been reluctant or unable to sell bonds. According to estimation by BIS, banks worldwide owed nearly $5 trillion to bondholders and other creditors that would come due through 2012. About $2.6 trillion of the liabilities were in Europe. U.S. banks must refinance about $1.3 trillion through 2012.
In addition, although Slovakia refused to sign the 440 billion euros European Financial Stability Facility’s (EFSF) framework agreement, the chairman of eurozone finance ministers, Jean-claude Juncker thought Slovakia would sign up before mid-july and the EFSF will be available without any doubt before the end of the month.
EU’s Olli Rehn said that the stress test exercise would be a paramount importance for restoring confidence. He added that the European Commission is ready to provide its state aid clearance rapidly if there is a need arising from these stress tests.
Versus Japanese yen, although the greenback rose sharply to 89.15 in Asia as Prime Minister Naoto Kan’s Democratic Party of Japan (DPJ) lost in Sunday’s Upper House election and this prompted traders to sell the Japanese yen, the pair fell down to 88.39 in NY morning before recovering. The ruling DPJ lost control of the Upper House(won only 44 seats but Naoto Kan has vowed to stay on) as early call by PM’s Kan to raise sales tax from 5% to 10% angered voters and the loss is expected to undermine efforts to cut the world’s largest debt. However, the DPJ-led coalition still has a majority in the more powerful House of Representatives.
In addition, S&P has said that Japan’s rating may be lowered if there is a lack of concrete fiscal consolidation steps.
In other news, Federal Reserve Governor Elizabath Duke said that she does not anticipate the U.S. economic recovery will suffer a double-dip recession. She added that the flow of credit from banks to businesses will gradually loosen up but there is no way for authorities to compel banks to lend from their excess reserve.
Although the British pound fell in tandem with euro in Asia and hit an intra-day low of 1.4949 in European morning, cable staged a strong recovery from there to 1.5087 on short-covering. Later, the pair dropped sharply again to 1.4993 after S&P affirmed U.K. ‘AAA/A-1+’ ratings but indicated Britain’s net general government debt burden may approach a level incompatible with the ‘AAA’ rating.
The British pound was also pressured as Bank of England policymaker Adam Posen said ‘there is a chance we could slip back into recession’. He also added ‘there is going to be a lot of drag on the economy with the problems of the eurozone and the public sector contraction in the UK’.
On economic front, U.K. final Q1 GDP unrevised at 0.3% q/q and -0.2% y/y while current deficit was 9.628 billion pounds, the biggest deficit since Q3 in 2007, versus the expectations of 4.70 billion pounds. Chinese exports in June rose by 43.9% y/y, better than economists’ forecast of 38% rise whilst imports rose by 34.1% in line with expectation.
Economic data to be released on Tuesday include: Australia NAB business confidence, Japan Industrial production, Capacity utilisation, Consumer confidence, Germany WPI, ZEW index, Swiss Combined PPI, U.K. BRC retail sales, RICS house prices, CPI, RPI , DCLG house prices, EU ZEW survey, U.S. Trade balance (usd), Fed budget, Canada Exports, Imports, Trade balance (cad).
