December 6 2012

In the broadcast today: What’s Next for the EUR & GBP after ECB & BOE Decisions? Following the Bank of England and the European Central Bank meetings, we examine the impact of the monetary policy decisions of these two central banks and explore what the future might hold for the EUR and the GBP, we analyze the latest trend developments in the EUR/USD and the GBP/USD currency pairs, we take a look at the weekly range established in the USD/JPY pair, we note the strengthening of the NZD vs. USD, we highlight the market’s reaction to the European Central Bank, the Bank of England and the Reserve Bank of New Zealand interest rate announcements, the U.K. Trade Balance, the Euro-zone GDP, the German Factory Orders, and the U.S. Jobless Claims, we discuss new forecasts from Goldman Sachs and Mizuho Bank, and prepare for the trading session ahead.

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Bank of England and European Central Bank keep interest rates unchanged in their monthly meetings. Growing crisis in Italian government. Fitch said the UK’s failure to meet a key public debt target ‘weakens the credibility’ of its triple-A rating…

Powered by article titled “Eurozone crisis live: UK credit rating under threat” was written by Josephine Moulds, for on Thursday 6th December 2012 13.16 UTC


Italian government bond yields continue to rise in response to the growing uncertainty over the future of the government. Tradeweb data shows the yield on the 10-year debt – effectively the interest rate – climbing to 4.57%.

Spanish bond yields are rising in sympathy, up 10bp at 5.53%.


Monti feels the heat

Is Italy entering a new era of political instability (see 12.01pm)? Open Europe thinks so.

The leader of Berlusconi’s senators, Maurizio Gasparri, said ahead of the vote, “Our attitude [today] signals…the shift of our group to a position of abstention towards the government.” This seems to suggest that Berlusconi’s party has withdrawn its support for Monti’s government.

If all of Berlusconi’s senators and MPs show next time and abstain (which, by the way, cannot be taken for granted, given the internal divisions created by Il Cavaliere‘s latest hints to a comeback), Monti would be in danger of losing his majority – since the absents’ votes do not count and bring the required majority down, as happened in the Italian Senate a couple of hours ago.

The big question is: was today’s an isolated incident or a definitive change of position? Gasparri’s words seem to suggest the latter could be true. Should this be the case, Berlusconi could be about to trigger another round of political uncertainty Italy really doesn’t need.


ECB leaves rates on hold

And the European Central Bank has… left rates on hold at 0.75% and announced no new stimulus measures. As expected. ECB president Mario Draghi will be speaking in 45 minutes when he will probably downgrade forecasts for next year.


Bank of England leaves rates at 0.5%

No surprise there then… the Bank of England left rates on hold at 0.5% and left the £375bn ceiling for quantitative easing unchanged.

Let’s see if the ECB has a bit more to offer in its press conference at 1.30pm.


Growing crisis in Italian government

Our Southern Europe editor John Hooper reports on the growing crisis in the Italian government.

Just an hour or so ago, I was saying I thought the markets were underestimating the potential for instability in Italy. But I didn’t expect to be proved right quite so swiftly.

The absence (or abstention) of senators from Silvio Berlusconi’s Freedom People (PDL) movement in the crucial vote this morning on the government’s second economic stimulus package has not killed off the measure, nor – for the moment – the government. The bill went through by 127 to 17 with 23 abstentions. And there were enough lawmakers present to ensure a quorum. But the stimulus package (which
has still to be approved in the lower house) is far from safe. And the same could be said of Mario Monti’s non-party government.

The PDL’s move could be dismissed as a reprisal for a remark by the bill’s sponsor, the economic development minister, Corrado Passera. In a clear reference to Berlusconi’s hint that he was about to re-enter the race for prime minister, Passera said that “turning back is not a good thing for Italy”.

But it is worth stressing that the leader of Berlusconi’s troops in the upper house did not say it was a one-off rap over the knuckles. Maurizio Gasparri said the PDL’s move signalled “the passage of our group to a position of abstention in relationship to the government”.

If that is the case, then the Monti government has just lost its
majority in the upper house: La Repubblica calculated a few minutes ago that the government can only now count on 131 votes out of the 161 it needs.

Monti is not doomed. But no one in and around the Italian parliament is going to need reminding that Silvio Berlusconi left office in November 2011 after he too lost the support of one – and only one – of the two chambers.


Monti loses majority in senate

The results are in from the Senate vote in Italy… Prime Minister Mario Monti’s austerity bill has survived the confidence vote, but Monti lost his majority, prompting speculation he may step down as early as today.


2-Pack and the notorious PIIGs

Thanks to my colleague Heather Stewart who has sent through what may be the best ever pun in a eurozone-related piece of research, from the lovely people at Lombard Street Research. Bit long but it’s worth a read (promise). Dario Perkins:

2-Pack and the notorious PIIGs

Everyone’s ashamed to the youth cause the truth looks strange/And for me it’s reversed, we’ve left them a world that’s cursed, and it hurts…/Don’t let me get teary, the world looks dreary, when you wipe your eyes see it clearly.” (2Pac Shakur)

Full of regrets and facing an increasingly sinister reality, it is perhaps unsurprising that European policymakers are turning to America’s greatest rap artist for solace. At least that was my reaction when I first discovered references to ‘Two-Pack’ in their banking union proposals. Unfortunately, it turns out their ‘Two-Pack’ is something far less glamorous – an ‘enhanced form of macroeconomic surveillance’ in the euro area. 2Pac famously started a war with another influential rapper; the Notorious B.I.G. Two-pack’s main ‘beef’ is with the notorious P.I.I.Gs. The rap war led to the death of both rappers in the late 1990s. It’s not clear the proposed banking union will fare any better.

He goes on to explain why the Two-Pack system of banking supervision will not work.

The ECB will host the banking union, but it won’t be able to recapitalize banks simply by creating money – the Germans want a clear separation between financial and monetary policy.

The euro crisis has changed but it isn’t over. The politicians will eventually realize 2Pac was right, ‘every time you come up, something happens to bring you back down’.


German factory data beats expectations

And the German factory data is in… and it looks pretty good. Manufacturing orders rose 3.9% in October compared with an expected rise of 1%.

Foreign orders rose an impressive 6.7% on the month, driven by orders from non-eurozone countries. Domestic orders ticked up by just 0.4%.


Berlusconi party bails on Monti confidence vote

Meanwhile, in Rome, Berlusconi’s party (PDL) has walked out of the Senate ahead of a confidence vote on prime minister Mario Monti’s austerity bill.

Reuters writes that the “symbolic move” does not threaten the government’s survival but shows strong disapproval of Monti’s administration from the largest party backing him.

PDL senate leader Maurizio Gasparri said the party would not take part in the vote on Monti’s latest package of reforms but would not vote against the decree or formally abstain, either of which would cause the government to fall.


Markets are clearly nervous about suggestions that Berlusconi might be about to stage a comeback (see 10.35am), with yields rising on 10-year government bonds.


Greek unemployment set to overshooot troika targets

Back to the Greek unemployment data briefly. Thinktank Open Europe notes that the target set by the troika of lenders – the EU, the IMF and ECB – for joblessness was 22.4% by the end of 2012. That is some way away from September’s rate of 26%.


Greek protests begin

Riot police are out in force in Greece for the protests marking the anniversary of the fatal shooting of a teenager by a police officer, according to reports on Twitter.


Berlusconi returns to the field

Here’s a story to keep you awake at night, Italy’s former prime minister Silvio Berlusconi is planning his return to mainstream politics. Our Southern Europe editor John Hooper writes:

All the talk in Italy this morning is of a statement put out late last night by – I’m afraid so – Silvio Berlusconi, strongly implying he intends to return as the candidate for the right in the general
election that has to be held in Italy by the spring. He had a meeting yesterday with top officials of his Freedom People (PDL) movement. An agency dispatch said he had told them he was not going to run because no one wanted him to. His statement said: “The reality is the opposite”. The website of his family’s newspaper, Il Giornale, headlined its frontpage with “Berlusconi returns to the field”.

Certainly, Berlusconi’s return would electrify politics in Italy, even though the PDL is currently getting only about 16% in the polls. But at least as significant as the billionaire TV magnate’s intentions were the terms in which his statement was couched. Implicitly condemning the non-party government of Mario Monti, which took over from his in November 2011, he said: “The situation today is a good deal more serious than a year ago.” He spoke of a country “on the brink of the abyss”: unemployment was up by a million; public debt had increased; Italians’ disposable incomes had collapsed and taxation was
at “intolerable levels”.

There is inevitably speculation that Berlusconi might now try to bring down Monti’s government before it completes its legislative programme (including some direly needed structural reforms) and that he will fight the next campaign on an anti-austerity, anti-Merkel platform. As Paul Krugman and any number of other economists will tell you, there are some pretty good arguments for a policy that puts growth before austerity. But Berlusconi is scarcely the man to implement such a policy. While he was in office, Italy’s economy grew by less than
almost any other in the world.

With Italian sovereign bond yields, relative to safe-haven Bunds, at their lowest for two years, it is clear the markets are dismissing the risk of renewed political instability in Italy. That would seem to be a remarkably complacent view.


Greek unemployment hits new high of 26%

And unemployment in Greece continues to soar, hitting a new record of 26% in September. 

Greece and Spain have been the worst hit in terms of unemployment. The jobless rate in Spain, which has slightly more timely data, rose to 26.2% in October, with more than half of its young people out of work.

Both are running at more than double the eurozone average of 11.6% in September.


Eurozone recession confirmed

But the currency bloc is still firmly in recession. Regional statistics agency Eurostat confirmed its estimate this morning that eurozone GDP fell by 0.1% in the third quarter, following a 0.2% fall in the second.

The wider 27-state European Union fared a little better, with output rising 0.1% in the third quarter.


European comeback shocker

Thanks to commenter ballymichael for flagging up the plight of billionaire hedge fund manager John Paulson, who told investors that the bulk of his losses this year came from bets that the European debt crisis would worsen.

Svea Herbst-Bayliss of Reuters reports:

Earlier in 2012 Paulson had expressed concern about Europe and tried to protect against a sovereign default.

But he acknowledged that the facts have now changed. Europe’s new central bank governor, Mario Draghi, showed a strong commitment to the region and to the common currency which hurt his initial thesis.

As ballymichael notes:

Yep. It’s difficult to see, in the day-to-day hectic of yet-another-failed-summit, but they’re actually making progress. And making guys like Paulson lose money? That’s kind of nice too.


Odds are shortening on the UK losing its triple-A rating by the end of the year.


The miserable UK trade data (see below) suggests Chancellor George Osborne should not rely on exports to drive a recovery, say analysts at Capital Economics. They write:

In its forecast published yesterday, the OBR expects net trade to provide some modest support to the economy over the next few years. But in the near-term, with the eurozone economy in recession and recent survey indicators suggesting mixed prospects for UK exporters, we don’t think that the economic recovery can rely on the export sector.


UK trade deficit with EU worst on record

Sticking with the UK, the trade deficit widened dramatically in October as exports fell and the price of goods abroad dropped.

The Office for National Statistics said the deficit grew to £9.5bn in october, compared with analyst expectations of £8.8bn.

That echoes yesterday’s analysis from the Office for Budget Responsibility that a collapse in trade is the key explanation for the continued slump.

The three-month trade deficit with EU rose to £14.6bn, the worst on record, with exports to Italy and Spain down by more than 10% over the year. On a brighter note, they rose by more than 5% to the US and China.


Markets higher in early trade

European shares are higher this morning, helped by gains at aerospace company EADS.

UK FTSE 100: up 0.4%, or 23 points, at 5915

France CAC 40: up 0.7%

Germany DAX: up 1%

Spain IBEX: up 0.6%

Italy FTSE MIB: up 0.75%


But it’s too early to break out the champagne on UK house prices, says Howard Archer of IHS Global Insight.

While an impressive looking rise in itself, this has to be put in the context that house prices had fallen in each of the previous four months including a drop of 0.1% in October.

The data reinforce our view that while significant downside risks remain to house prices, they are likely to be broadly flat over the coming months. Recent signs of modestly improving housing market activity and the likely increasing beneficial impact of the Funding for Lending Scheme on mortgage lending underpin our belief that house prices will broadly stabilise.

However, we suspect that any significant, sustainable turnaround in house prices is still some way off.


UK house prices up 1%

Back to the UK, where house prices rose by 1% last month, according to mortgage lender Halifax.

That was much stronger than expected, with economists forecasting an increase of just 0.2%, but prices in the three months to November were 1.3% lower than a year ago. Halifax says prices are likely to remain broadly unchanged in 2013. Economist Martin Ellis said Bank of England measures to boost lending appeared to be working.

There are signs that the Funding for Lending scheme (FLS) is helping to reduce mortgage rates and may be contributing to the recent pick-up in mortgage approvals. The FLS should help to ease credit constraints, resulting in some improvement in mortgage availability in 2013.


ECB and Bank of England previews

Quick look ahead to the central bank meetings later today.

The Bank of England’s monetary policy committee meeting is likely to be uneventful. Analysts widely expect the bank rate to be left at 0.5%, while the level of quantitative easing will be left unchanged at £375bn.

It’s just the statement today, but we’ll get more detail when the minutes are released in a couple of weeks. Barclays economists, Chris Crowe and Simon Hayes write:

In our view, the November Inflation Report signalled that the MPC was broadly content with current policy settings, with inflation forecast to undershoot the 2% target at the policy-relevant horizon, but only marginally. MPC comments in the last few weeks have taken a slightly more dovish tone, and we view these comments as suggesting that the committee is ready to undertake further QE should the outlook for activity deteriorate. For the time being, though, we see little reason for the MPC to have changed tack.

There should be some news out of the ECB press conference at 1.30pm, however. Although economists don’t expect the bank to act on rates yet, ECB president Mario Draghi is likely to give some gloomy forecasts for next year, which could offer clues on the direction that policy will take.

Phillip Shaw at Investec says the ECB is likely to have discussed a rate cut at this meeting, although he expects no change this month. In terms of the ECB’s bond buying programme, he writes:

We would expect the ECB President simply to reiterate that the ECB has a fully effective backstop mechanism in place, ready and waiting for when it is needed. Overall, we do not therefore expect any major new policy announcements at next week’s meeting. Most significantly, we will watching for clues as to how close the GC got to sanctioning a further reduction in the main refi rate.


Protests expected in Greece

Over to Greece, where there are likely to be protests as the country marks the fourth anniversary of the murder of teenager Alexis Grigoropoulos by a police officer. The fatal shooting in 2008 sparked a week of riots. Reports on Twitter suggest protests will begin at 11am. More on that later.


French unemployment rises to 10.3%

It’s a tale of two jobless queues this morning, with France posting an unemployment rate of 10.3%, while Switzerland’s is running at just 3.1%.

The French jobless rate ticked up 0.1% in the third quarter to its highest level since the third quarter of 1999, according to date from the national statistics agency INSEE. Young people, in particular, struggled to find work, with youth unemployment rising to 24.9%.

Over in Switzerland, meanwhile, the jobless rate ticked up to just 3.1% in November from 2.9% in October.


Deutsche hid $12bn losses, say staff

There’s trouble brewing in Germany’s biggest bank. The FT is running a story that Deutsche Bank failed to recognise up to $12bn of paper losses during the financial crisis, helping the bank avoid a government bailout, citing complaints by three former bank employees to US authorities.

Tom Braithwaite, Kara Scannell and Michael Mackenzie write:

The three complaints, made to regulators including the US Securities and Exchange Commission, claim that Deutsche misvalued a giant position in derivatives structures known as leveraged super senior trades, according to people familiar with the complaints.

All three allege that if Deutsche had accounted properly for its positions – worth $130bn on a notional level – its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bail-out to survive.


Greece in ‘selective default’

It’s not just the UK’s credit rating under threat. Rating agency Standard & Poor’s last night put Greece in ‘selective default’ after the country began to buy back debt at a big discount. The rating agency said in a statement:

We lowered our sovereign credit ratings on Greece to ‘selective default’ following the Greek government’s invitation [on December 3] to private sector bondholders to participate in a series of debt buyback auctions. In our opinion, Greece’s invitation constitutes the launch of what we consider to be a distressed debt restructuring.


Today’s agenda

As well as the central bank meetings, there is eurozone GDP data out later that will confirm the currency bloc is in recession.

  • France unemployment data: 6.30am
  • UK trade data for October: 9.30am
  • Eurozone GDP for third quarter: 10am
  • Germany factory orders for October: 11am
  • Angela Merkel and Israeli PM hold press conference: 11am
  • Bank of England MPC announcement: 12pm
  • ECB announcement: 12.45pm
  • ECB’s Mario Draghi gives press conference: 1.30pm
  • US jobless claims: 1.30pm
  • Another Merkel press conference: 3.30pm

In the debt markets, France is selling €3-€4bn of six to 15-year debt.


Good morning and welcome to our rolling coverage of the eurozone debt crisis. We’ll be mopping up the fall-out from the Autumn Statement yesterday, which has already prompted one of the rating agencies to warn on Britain’s triple-A status.

The Bank of England and the European Central Bank hold their monthly meetings today to discuss interest rates and any stimulus measures. While neither is expected to change policy, the ECB will update its forecasts, which are likely to present a grim outlook. © Guardian News & Media Limited 2010

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