The Euro, Banks and Markets Drop in the EU

Early this morning, Moody’s downgraded the financial ratings, and long-term debt and deposit ratings for BNP Paribas, Societe Generale and Credit Agricole.

Moody’s reduced the long-term debt rating of BNP Paribas, France’s largest bank by market capitalization, to Aa3. Societe Generale, the second-largest, was downgraded to A1, and Credit Agricole to Aa3.

These downgrade are after  the European Banking Authority said it estimated French banks needed to increase their capital by just €7.32 billion–significantly below its October estimate of €8.8 billion–to comply with tougher rules intended to help stabilize the euro zone.

While the downgrade only brings Moody’s in line with other agencies’ ratings of the big three, it once again highlights significant concerns about French banks.

Despite their efforts to shrink their balance sheets in a bid to increase capital buffers and reduce financing needs, French banks continue to face major liquidity and funding constraints, and remain significantly exposed to the sovereign debt of troubled Southern European states, Moody’s said.

The downgrade is the consequence of increasingly difficult market conditions and the recent move by Standard & Poor’s to put France’s own rating on review for a downgrade.

The markets are expecting comments today by S&P in response to Friday’s outcome of the EU Summit.

Markets on Friday were little affected and Asian markets soared this morning catching up on Friday’s news.  But as the morning progressed, the markets began to show disillusion with the response by the EU.

Everyone is in agreement that the new “fiscal pact” will be good in the future to keep the eurozone countries inline and within a balanced budget but the outcome has little effect on the current situation.

Even though the ECB has pledged to maintain liquidity in the banks, there are too many factors weighing on the financial systems and Europe seems to be sidestepping the immediate problems

The euro maintained strength on Friday, but as the markets began to open on Monday, the euro began to fall.

Problems began to develop shortly after the announcements on Friday of the future plans for the EU. Within hours the IMF was having problems getting additional funding from non EU members as there was not a direct plan or goal to help the countries by the EU. The EFSF was not defined or expanded and the new EU pact will not be finalized until spring, leaving markets and investors in turmoil.

Banks moved lower, with HSBC Holdings PLC dropping 1.3%, Banco Santander SA down 1.4% and Standard Chartered PLC off1.7%.

The German DAX 30 index fell 1.2% to 5,912.53.

Shares of Societe Generale SA lost 2% in Paris, pulling down the French CAC 40 index 1% to 3,139.27.

The FTSE 100 index fell 0.4% to 5,506.28 Banks also fell in the UK, with Lloyds Banking Group PLC Royal Bank of Scotland Group PLC   each dropping around 2%.

 

 

 

Asian Markets Open With A Bang While The Rest Of The World Contemplates The EU Debt Crisis

Asian markets shot up this morning in response to Friday’s announcements from the EU Summit and the ECB. Asian exchanges were closed by the time final decisions were became public on Friday. Following the release of the “fiscal plan”, US markets rebounded on Friday.

Japan’s Nikkei Stock Average jumped 1.3%, Australia’s S&P/ASX 200 index increased 1.2% and South Korea’s Kospi was up 1.1%.

This morning Australia released their latest trade and export data, Australia’s seasonally-adjusted trade surplus declined to 1.6 billion Australian dollars ($1.6 billion) in October, from A$2.2 billion in September, the Australian Bureau of Statistics reported Monday. Exports totaled A$27.3 billion in seasonally-adjusted terms, while imports totaled A$25.7 billion, according to the ABS data. Economists were disappointed in the 1.6 billion surplus they had been expecting a trade surplus of A$2.0 billion.

Yesterday, the Bank of International Settlements  wrote in their quarterly release an endorsement of coordinated action by the world’s largest central banks to ease funding conditions for banks.

“A freezing of interbank markets in major funding currencies, as during the recent crisis, may require the ability to supply official liquidity in major currencies in an elastic manner,” the BIS report further stated. “Only the currency-issuing central banks have this ability.” The BIS’s paper was its latest in a series analyzing the concept of global liquidity, and focused again on the interplay between official liquidity, that is, created by central banks, and the far greater liquidity created by the private sector on the basis of central bank money.

Economists, government finance ministers, and investors have had the weekend to digest the volume of news and plans released last week ranging from the UK departure from the EU, the ECB interest rate reduction and comments, the “new fiscal pact” for Europe, the short term and long term effects on the debt crisis throughout the world.

The biggest fear for now is, on the short term, the austerity measures each government will need to impose will effectively put the brakes on European economies and growth.  The eurozone leaders today have by passed a plan to deal with the current crisis, their new pact although a way to prevent future problems, does not deal with the current debt crisis in Europe. Germany and France have used these difficult economic times and global pressures to manipulate the countries of the EU into this pact without dealing with the current problems. The fiscal pact will take months to be finalized, and is just the starting point for negotiations between EU members.

If the markets lose faith in the EU leaders, or to much bickering and trouble erupts while trying to implement this new pact, the markets could react severely. Merkel and Sarkozy are only safe as long as the markets believe they can pull their plan off. As to the current situation, the markets are nervous, investors are worrisome.

This leaves the global economy exposed to further financial turmoil in the weeks and months ahead. Already, emerging markets are facing a credit squeeze as Europe’s banks sell assets and bring money back home to strengthen their balance sheets. This looks set to worsen after the European Banking Authority last week said the region’s banks must raise 115 billion euros in extra capital.

International trade credit also is tightening as European sovereign credits are downgraded, pushing the cost of government-backed trade insurance above those for emerging countries.

The U.S. is alone among major developed economies in reporting its economy is gradually improving. Consumer sentiment brightened in early December, auto sales are climbing, order books are filling up and unemployment is retreating. This will strengthen its resilience against the global slowdown and Europe’s woes. It by no means says that the U.S. is out of economic woes and this good news can turn bad quickly. No country is a financial island. We would feel the effects of the slowdown spreading in the first quarter of next year.

If the European crisis is contained, analysts say it will shave only a few tenths of a percentage point off U.S. GDP growth, currently seen around a 2.5 to 3 percent rate. But the financial contagion could worsen and pull down growth.

The Federal Reserve at its Tuesday meeting is expected to take no fresh action to support growth, although it may discuss ways to communicate the future path of its monetary policy in preparation for any additional easing measures next year.

Much of Europe is widely seen as already in recession. Even in Germany, the euro zone’s powerhouse, the central bank slashed its 2012 growth forecast last week to 0.6 percent from 1.8 percent. An early read of the PMI manufacturing survey due on Thursday will measure the speed of the downturn.

The world still sits and waits on Europe’s grand plan, the ECB and the IMF seem to be in holding patterns. The IMF is facing difficulties raising funds as countries want to know their exact plans and guarantees before adding money to their emergency funds.

There should be a lot of stress on the euro and the gbp this week.

EUR/GBP Forecast Dec. 12th, 2011, Technical Analysis

EUR/GBP had another back and forth session on Friday as traders continue to mull over the situation in Europe. The summit produced a reasonably accepted solution, but not a final one. The lack of fiscal union with the Euro will still be a concern, and the UK is so attached to this area that the market is having a hard time differentiating between these two currencies. With this in mind, we think that the pair should continue to bounce around between the 0.85 and 0.8650 levels.

EUR/GBP Forecast Dec. 12th, 2011, Technical Analysis EUR/GBP Forecast Dec. 12th, 2011, Technical Analysis

EUR/GBP Forecast for the Week of Dec. 12th, 2011, Technical Analysis

The EUR/GBP pair has been a sideways market for the last month or so. The truth is that both of these currencies simply aren’t liked by many. The pair looks to be stuck between the 0.85 and 0.8650 levels, and there isn’t much to suggest that we are going to break out of this range in the short-term. This is especially true since the holidays are coming up soon, and the traders will certainly be away from the markets the later we get in the month. With this in mind, we still see this as a day trader’s market for the next several weeks.

EUR/GBP Forecast for the Week of Dec. 12th, 2011, Technical Analysis EUR/GBP Forecast for the Week of Dec. 12th, 2011, Technical Analysis

The EURO Survives

It was a crazy week. Markets Up and Markets Down, the EURO up and the EURO down. Oil hits highs, and gold falls. All week no one knew exactly what to expect. As the week, drew to the grand finale, the EU Summit, investors nerves were frayed. Traders did not know what to expect.

Early, in the week, the Euro was strong, due to statements from Sarkozy, Merkel and the ECB. It looks like great strides were made. Plans were being formulated and agreements been negotiated. By mid-week, the President of the ECB threw a wrench into the plans and made some negative comments and the euro plunged. The EUR/USD was gaining strength and the US dollar was picking up momentum.

From the sidelines came the warning from S & P on the possible future downgrade of many European nations. A bleak warning of what was ahead. Global markets fell and currencies dropped.

As the week came toward the crescendo, Mario Draghi, President of the European Central Bank, really tossed a lion into the den of sheep. First the ECB lowered their interest rate by .25% a move that the markets were predicting.

This was followed up by announcements on Thursday at the conclusion of the ECB meeting, in which ECB President Mario Draghi laid out 3-pillars for the “Fiscal Compact”.

He also stressed the ECB will not use QE nor will it purchase unlimited amounts of European bonds. The EUR fell below the 1.33 level following the disappointing comments. ( read the full statement )

Mr. Draghi remarked that he was “kind of surprised” at how markets spun his earlier comments. But he shouldn’t have been, analysts say, given how focused investors around the globe were for any tidbit of his thinking.

News began to leak out of the EU Council and the EU Summit and then became evidently clear that David Cameron, UK Prime Minister, would not agree to the new treaty without additional guarantees, that Merkel and Sarkozy, were not about to offer or accept. Depending on your view point, they either forced the UK out of the EU or Mr. Cameron, walked.

Still the markets were amazingly quiet. All predictions and suggestions were for turmoil all day on Friday, with disastrous effects on the Euro. But there was little movement and the Euro ended up in positive territory.

Global Watchers have been totally surprised by the fact that Merkel and Sarkozy were able to offer a new pact to the remaining EU countries without Britain and find mutual consensus not just among the 17 nations on the eurozone but also of an additional 6 other EU member states. It looks like the EU will survive, with new rules and regulation, and that the ECB will support this move.

Again markets did not surge or plunge. Investors seemed to be shocked and amazed. The comments heard on the exchanges were diverse, but the overall opinion, was at least the EU Ministers showed leadership and a plan. It is still a difficult road ahead and tensions will grow, many countries will have difficulty implementing the new fiscal pact, many countries will have to explain austerity measures to their citizens.

The EURO Survives

The world is hoping that we have the first steps of global recovery. It looks like all parties are working together. How will the markets react this coming week is a guess. What is going to happen when investors and economists have had time to interpret this new accord? No one knows but it will be a bouncy ride in the short term.

EU Summit Fails To Get 27 Nation Support

European Union summit has failed to secure the full backing of the 27 nations for treaty changes to help fight the region’s debt crisis by coordinating fiscal policy, according to reports. Citing unnamed diplomats and senior European officials the reports said that the summit talks would now concentrate on forging an agreement between the 17 euro-zone members and any other countries that wanted to join.

No one knows where these meeting will lead. This will leave the markets in turmoil on Friday morning.

A full agreement fell through after the U.K. asked for concessions that France and Germany weren’t willing to give, according to a Reuters report.

Ministers and Leaders started what are being viewed as make-or-break talks for the eurozone at dinner Thursday, and the talks went on into the early hours of Friday morning.

Prior to the summit on Thursday, UK Prime Minister Cameron, President Nicolas Sarkozy and German Chancellor Merkel held 45-minute talks, but sources said there was “no movement” with each side setting out their respective ground. David Cameron has repeatedly warned he will veto anything which harms British interests.

By late Thursday night, a set of draft conclusions began circulating in Brussels and were leaked to several news agencies.

The draft text sets a limit on structural deficits of 0.5% of GDP, compared with the present limit of 3% including debt repayments.

It also includes a way of increasing the firepower of the eurozone bailout fund above 500bn euros (£426bn; $670bn) – a measure which Germany has staunchly opposed.

The Prime Points:

  1. The European Commission to have the power to impose penalties for nations that run excessive budget deficits
  2. All 17 eurozone nations should amend their national legislation to require balanced budgets
  3. The eurozone countries to have common corporation and financial transaction taxes
  4. Any future bailouts would not require private investors to absorb part of the costs, as happened in the case of Greece

EUR/GBP Forecast Dec. 9th, 2011, Technical Analysis

EUR/GBP fell fairly hard during the session on Thursday as the Euro region continues to find one problem after another. The headlines coming out of Europe aren’t overly positive at the moment, and the world is waiting for the end of the EU summit in order to see a possible solution. It looks like the markets might be disappointed though, based upon the leaks that are coming out of those meetings.

The daily candle formed a hammer right at the 0.85 level, and this shows the support level is still intact. The breaking of the daily range from Thursday would be very bearish indeed and have us aggressively short of this pair. A break of the top of Thursday’s range has us in a short-term scalp for about 50 pips on the long side.

EUR/GBP Forecast Dec. 9th, 2011, Technical Analysis EUR/GBP Forecast Dec. 9th, 2011, Technical Analysis

The Lead Up to the Main Event – ECB Cuts Rate

Today, the European Central Bank cut its key lending rate, as predicted, by a quarter point to 1% in the face of a looming recession, while investors awaited word from Mario Draghi on other measures aimed at addressing the euro zone’s sovereign debt crisis. Mario Draghi, is due to make a global appearance and statement shortly today. He will explain his reasoning for the rate cut and also his predictions for Europe. He will be keeping his statements limited allow the EC Summit to conclude their meetings tomorrow.

The big event will be the ECB president’s news conference, which will be watched for any new measures to help the euro zone’s struggling banking sector and any indication the central bank is ready to step up its purchases of government bonds. Every word, every statement, each sentence will be analyzed and explained as investors and politicians try to understand exactly what the ECB has in store.

The reduction is the second rate drop presided over by Draghi in just a months and brings the refinance rate back to a record low, undoing a half-point worth of rate hikes implemented earlier this year.

The ECB also lowered the interest rate on its marginal lending facility by a quarter point to 1.75% and cut the interest rate on its deposit facility by a quarter point to 0.25%.

In the most poorly kept secret in Europe, Draghi is widely expected to announce the ECB will provide a larger range of long-term loans to commercial banks, including two- or possibly three-year maturities in an effort to combat signs of stress as fears of default and debt-market carnage make banks wary of lending to each other but the ECB chief is seen as likely to hold off on committing to more aggressive efforts to battle the debt crisis by stepping up its bond-purchase program until after a closely-watched European Union Summit ends on Friday.

 

The announcement had surprising little effects on the market.  Currencies traded in tight ranges in after the expected decision by the European Central Bank. The euro was recently trading at $1.3412 compared with $1.3413 late Wednesday in New York, and slightly higher than before the ECB announcement.

Concurrently the Bank of England, BoE’s Monetary Policy Committee has just announced its decision to maintain its key policy rate unchanged at 0.5%.

Fear Contagion – Who Is In Control In Europe

Fear is spreading throughout the markets today. Fear is spreading among government officials. Fear is spreading though business and corporations. Fear is spreading Bank to Bank.

With each hour, the possibility of a collapse of the EU becomes a stronger possibility. Merkel and Sarkozy, have an interesting proposition, a new treaty to solve future problems, but is it the right time to implement.

The markets are demanding immediate results and an immediate call to action. A new treaty however suggested, however presented will take a long time to implement and there is more and more concern that several countries will not be willing to sign such an agreement, many countries will need legislative approval, which could take a great deal of time. The question the markets are asking is how the EU will present a recovery plan when they do not have an agreement.

How will the ECB handle the situation, at present the Central Bank seems to have decided to act on their own, to implement a plan to protect the markets, avoid defaults and to maintain liquidity? The European Central Bank is expected to deliver its second rate cut in as many months on today. “The ECB will make no promises at its press conference on Thursday,” said Gilles Moec, economist at Deutsche Bank. European leaders need “to be as ambitious as possible on Friday. … Assuming a strong enough ambition and a broad enough consensus, we believe the ECB can increase its intervention thereafter.”

The hint has been credited with helping defuse tensions in the European bond market. Outright yields of Italian and Spanish government bonds have fallen sharply since Draghi’s remarks last Thursday, cutting the premium investors demand to hold peripheral government debt over German bonds.

Namely, investors will be looking for further clues that the central bank is willing to expand its bond-buying program after the ECB president last week told the European Parliament that “other elements might follow” if European leaders put together a credible “fiscal compact.”

With each passing moment, the likelihood of the euro failing becomes more and more inevitable; the likelihood of a breakup of the EU becomes a stronger possibility. The International Business Times reported the main news today was Germany trying to douse expectations for the EU Summit, via an anonymous official. That means that divisions remain and that European politicians may not be able to come together to agree on tough decisions in such a short timeframe.

Private and Public businesses are preparing themselves for the worse, the question is how do you prepare?

Gold  the safe haven has seen a rise on the daily chart and is currently trading at 1737.67 U.S. dollars per ounce, since the opening of trading at 1727.44 dollars an ounce. Oil has settled and is  trading near record highs, opening up to 101.25 dollars a barrel, and climbing since the opening of trading at levels of U.S. $ 101.31 a barrel.

Today’s Wall Street Journal: “An official said Germany was more pessimistic about the success of the summit than it was last week and said the European Financial Stability Facility and the permanent European Stability Mechanism, which is due to start in 2013, won’t run simultaneously, pouring cold water on earlier press reports. The official added that there were no additional resources planned for the ESM.”

Several economist say that this week’s meeting of the EU has the potentially of a make-or-break summit for the euro.

EUR/GBP Forecast Dec. 8th, 2011, Technical Analysis

EUR/GBP fell hard on Wednesday as traders continue to sell the Euro. The Pound was actually fairly strong during the session in general, so this pair only had one way to go in the end. The 0.85 level below continues to hold as support, so the move was somewhat limited, and a downside break below that number is what it would take to get us to sell at this point. The most likely scenario is that we could continue to see consolidation between the 0.85 and 0.8650 levels, and this is what we are expecting to see as these two economies are so intertwined. The EU summit meeting over the next couple of days will be important to the future direction of this pair, so we are holding off on trading this pair currently.

EUR/GBP Forecast Dec. 8th, 2011, Technical Analysis EUR/GBP Forecast Dec. 8th, 2011, Technical Analysis

Central Banks Around The World Wait for EU and ECB

Earlier this week the Reserve Bank of Australia, dropped their rate .25% from 4.50% to 4.25%, following a rate reduction last week by the Peoples Bank of China. The rate drop was to add stimulus to the economy, and also keep Australia at par with their major trading partner China. The announcement made little of the debt crisis in Europe and was more focused on Asian economies and export growth.

Today, in a very defined statement, both the Central Banks of New Zealand and South Korea put their rates on hold until the completion of the EU Summit this week

New Zealand maintained their rate at 2.5%, while South Korea froze its cost of borrowing at 3.25%.

Analysts said uncertainty in the global economy is now the top concern for some countries, even as prices remain high.

New Zealand Central Bank stated it was taking steps to limit the impact of global economic problems.

“Given the unusual degree of uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent for now to keep the official cash rate on hold,” said Reserve Bank of New Zealand Governor Bollard stated

Mr. Bollard continued to say that inflation was expected to fall within the bank’s target of 1% to 3% in the three months to December.

Whereas South Korea continues to face serious problems with out of control inflation. The proper action would have been a rate increase to slow inflation and spending, but the Central Bank is facing the problem of economic slowdowns throughout Europe. They are treading a thin line.

The Bank of Korea  is expected to continue to freeze rates and maintain its loose monetary policy until the economy stages a meaningful recovery. This is a dangerous path, but the only wise choice for the bank at this time, until there is some direction in Europe.

Inflation in South Korea jumped above the central bank’s target of 4% in November and economist expect it to remain high into the near future.

All eyes this week are aimed at the ECB meetings and the EU Summit. The ECB is expected to reduce their lending rates to 1%. ECB Director Draghi has stated that the ECBs mandate includes fighting deflation as much as fighting inflation, and with the Eurozone economy certainly in a recession now, the ECB can justify rate cuts.

EUR/GBP Forecast Dec. 7th, 2011, Technical Analysis

EUR/GBP reversed the previous day’s fall on Tuesday as traders continue to push this pair back and forth. The market is a battle between unloved currencies, and the recent consolidation range shows that quite clearly. The 0.8650 level is resistance, and the 0.8500 level is support. This should continue to be the case for the near-term future as the financial situation in the EU will continue to have an adverse affect on both currencies. Since we are in the middle of the range, we see no trades presently.

EUR/GBP Forecast Dec. 7th, 2011, Technical Analysis EUR/GBP Forecast Dec. 7th, 2011, Technical Analysis

The European Crisis Countdown

It is Wednesday morning, the markets have not opened in Europe as of yet. Asian markets have climbed this morning after a report that more rescue funding may be available to help the eurozone.

The markets are totally reactionary, responding to every bit of news. Investors aren’t looking at charts and graphs, they are not using technical analyst to trade this week. It is purely fundamental.

News, Reports, Events, and Statements. Everything is tied to Brussels.

If you notice the peaks and troughs in the chart they are tied directly to news releases, statements and reports released in regards to the European Debt Crisis. Last Fridays US report that showed Unemployment dropping to 8.6% barely made a blimp on the markets.

BBC is reporting that a leaked report for a crucial EU summit beginning on Thursday that European Council President Herman Van Rompuy says that “Tougher rules to tackle the eurozone debt crisis can be achieved without changing EU treaties”, he offers a fast-track “fiscal compact” that does not need lengthy ratification by parliaments or national referendums.

France and Germany are pushing for a new EU treaty by March, saying stricter rules should be added.

It seems that the EU and the European Council are on different tracks.

Three crucial days for the euro as the countdown continues

  • Wednesday: The meetings continues as many EU leaders gather in France for a European People’s Party congress
  • Thursday: ECB’s monthly policy meeting could produce new measures. Mr. Van Rompuy will be chairing the two-day summit, which promises to cause a lot of friction between the leaders
  • Thursday and Friday: Crucial EU summit in Brussels to consider Sarkozy-Merkel plan. Will they be able to get the EU ministers to agree as quickly as they need?

The credibility of the single the currency of 17 European countries -is at stake. There have been plenty of “quickie” EU summits in the past two years aimed at tackling the debt crisis spreading through Europe. The crisis has deepened, threatening to turn economic troubles into a full blown recession.

Germany’s Merkel believes the only way to prevent a crisis happening again is to build the budget rules in EU treaties. There would then be a mechanism in primary EU law to impose penalties on countries that go beyond agreed deficit limits. Will these member states accept punishment?

Chancellor Merkel wants other eurozone countries to duplicate Germany’s budget discipline, so that their borrowing is kept under control. France’s President Nicolas Sarkozy is now agreeing with her, but there is no agreement yet on the details of treaty change.  There are too many stumbling stones to get past in time to save the euro.

Perhaps the Council plans is more efficient, as the EU needs a response now, not debate.

In the leaked report, details of which have been obtained by the media, Mr. Van Rompuy proposes a plan called “new fiscal compact” without holding a referendum or ratification by the parliaments of each eurozone country. The report says that tougher fiscal reforms can be adopted simply by amending a protocol “a procedure that needs national consensus but does not require substantial changes to the EU treaties.”

This, Mr. Van Rompuy argues, would speed up the implementation of reforms and remove any potential political complications. Here we have two opposing views. What will happen over the next few days?

EUR/GBP Forecast Dec. 6th, 2011, Technical Analysis

The EUR/GBP pair fell hard on Monday as traders abandoned the Euro in droves. Although there was good news coming out of the meeting between Sarkozy and Merkel in the form of a framework for fiscal union, the afternoon saw a sell off as the S&P ratings agency said at they are putting 15 Euro countries on “Credit Watch Negative”. As this was announced, the Euro got hit across the board.

This pair is essentially an argument of two unloved currencies. The Pound isn’t exactly one that the trading community has been excited about either. The result has been an extremely range bound market that has been stuck between 0.8650 and 0.8500. The range should continue to be the outer limits of this market, and it will take some kind of special move in order to make this pair escape that area. However, once it does – this pair could go onto a larger move overall. The most recent trend has been somewhat negative, but not impressively so. Because of this, we feel that the rallies are to be sold as it seems to take less to push this pair down than it does to lift it up.

The UK economy is heavily exposed to the EU as well, as 30% of the UK’s exports end up in the EU. Because of this, as the Europeans enter recession; this will significantly impact the economy of the UK in the longer-term. With this in mind, this pair will continue to be choppy and range bound, and this pair might have a downward bias – but the truth is that Europe’s pain is also the United Kingdom’s pain. The pair should continue ot be range bound for the foreseeable future, barring any real meltdown in Europe.

EUR/GBP Forecast Dec. 6th, 2011, Technical Analysis EUR/GBP Forecast Dec. 6th, 2011, Technical Analysis

Markets Tumble As Standard & Poor’s Issues Warning

Monday morning, the markets opened with good intentions. The weekend had brought positive progress from the French and German leaders. Monday’s meeting brought good news. The euro, which was predicted to fall after the Friday speeches from Merkel and Sarkozy showed huge disparity in their views for a future eurozone and they were far apart on agreements for a new EU treaty. On Monday morning, Italy’s new Prime Minister Monti, unveiled Italy’s tough austerity plans. Ireland’s leader made a public speech outlining Ireland’s plans to get their finances and debt under control. Greece continued to improve and bond yields were dropping.

The euro, spent most of the day in positive territory. All exchanges and markets in Europe moving upwards.

On Friday the only good news was the US employment drop to 8.6%, not a great number, but compared to the 9.0% that had been reported most of the year, this was good news.

Investors over the weekend, would have bet that Mondays markets would have

EUROPEAN MARKETS DOWN

US MARKET UP

USD STRONG

EUR WEAK

What we ended up with at the close on Monday of US markets

EUROPEAN MARKETS SOARED UP AND CLOSED DOWN

US MARKETS OPEN UP AND THEN DROP DOWN

USD OPENED DOWN AND THEN CLOSED UP

EUR OPENED UP AND CLOSED DOWN

 

What caused this to happen?

Investors are worn to the brink, they are no longer making smart investments, their nerves are frayed and they are reacting to each piece of news. As it drives markets up and down.

Ratings agency Standard & Poor’s warned it might downgrade euro zone countries en masse if European leaders fail to produce a credible plan to solve the region’s debt crisis at a summit later this week.

The unprecedented warning brought to a halt a rally in global equities on Monday, when the leaders of France and Germany agreed a plan aimed at guiding the region out of its two-year-old crisis. S&P said it had told 15 of the 17 euro zone countries, including Germany, France and four others with the top AAA credit rating, that it might downgrade them within 90 days, depending on the outcome of Friday’s summit.

The warning took the sheen off a Franco-German agreement, to be put to other member states on Friday, to impose budget discipline across the currency area through European Union treaty changes.

 

What effect can this have?

Many pension funds mandates of triple-A rated holdings will be forced to sell government issues, which could trigger a surge in yields as prices plummet.

Funds that will be required to divest of non-AAA investments are few and does not expect a huge impact in the market from such sell-offs.

On Monday also federal regulators approved tougher rules on Wall Street risk-taking on adopting the MF Global rule, named after the collapsed brokerage firm that is believed to have improperly used millions of dollars of customer money.

The new rule will limit how the brokerage industry can invest customer money, largely barring firms from using client funds to buy foreign sovereign debt. It also prevents a complex transaction that allowed MF Global, in essence, to borrow money from its own customers.

It’s All In The Numbers

Is this the equation to save the Euro or to for the destruction of the Eurozone ?

 (Greece + Itay + Spain) + (Ireland + Portugal + Belgium )/ Germany + France =ECB + IMF (Russia + China + Mexico + USA) 

With the prospect of defaults by Greece, and the more remote potential of losses on debt from Italy, Spain, Portugal and Ireland, the banks will deplete the capital they have and will need to raise more. Italy’s debt is the largest, at about 1.8 trillion euros ($2.6 trillion) is five times larger than what Greece owes.

The last issue is how much money should be added to the existing European Financial Stability Facility, which would provide backup borrowing authority to support eurozone countries. There is broad agreement that the existing 440 billion euro fund is too small.

Greece’s creditors may be forced to write off as much as 60% of its 329 billion-euro ($458 billion) debt.

Across the continent, Ireland’s Brian Lenihan’s presented the 2011 Budget this past week; he stated that there will be budget deficit of €17.7bn and public debt/GDP ratio at 99% plus economic output. The Irish government is going to begin a period of “austerity” to try to handle this deficit internally after having already taken a bailout from the EU.

It’s All In The Numbers

 

Irish Debt

Back to Europe, Belguim’s bond yields have soars on their banking problems. There is a possibility that they may be facing some difficult times.

 

Dexia, a bank specializing in local government financing, has had its Belgian arm bought by the country’s government, with Belgium, France and Luxembourg in a €90bn guarantee. It’s the first lender to fall victim to the eurozone crisis

European officials began scrambling to find ways to lend financial aid to Portugal on Thursday after the debt-ridden Iberian nation bowed to market pressure and decided it had no choice but to ask for help.

Raising taxes and selling stakes in some of the country’s biggest companies to comply with the terms of the 78 billion-euro ($105 billion) aid package.

The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro- era record of 10.78 percentage points on July 12 and was at 10.23 points yesterday, double the 5.11 points when former Prime Minister Jose Socrates sought the rescue on April 6.

The 10-year bond yield was at 12.03 percent up from 10.14 percent at the start of this month amid concern among investors about contagion from a potential Greek default.

The question is just how much can the EU afford, how much can the EU raise or leverage, conservative estimate estimates are place at 1.3 trillion dollars with leverage. The IMF emergency funds are below 400 billion euros. How much will Germany and France absorb? How will they survive if their borrowing rates soar?

Can Sarkozy and Merkel, reach an agreement this week with EU leaders and the ECB and the IMF. December 9th is D-day.

Cultural Differences Between France and Germany

The European Union is an amazing attempt at merge many governments and economies that are not only seperated by religion, politics and social reforms, but also by cultural differnces. All 17 members of the Euro agree there are major economic and political pressures facing each individual government. They all agree that radical changes need to be instituted. They all agree that they need to help the countries facing economic problems. They all agree that each country should maintain independence. They all agree that they need to work together for the common good. They all agree that government debt must be lowered, government services need to be move to private sectors. They all agree they need to be competitive in the global markets.

What they can not agree on is how ?

The problems facing the EU is as old as the problems in the middle east. The cultural differences, the way the people think and the way they deal with issues.

Split Decision

Germany and France still divided on healing euro woes

Merkel

Wants automatic sanctions against budget sinners

  • Rejects issuing euro bonds to help alleviate crisis

Sarkozy

  • Grudgingly accepts ‘more automatic’ sanctions
  • Favors issuing euro bonds to protect market access

The Arabs and the Nomads, the Christians and the Jews, the Islamics and the Secular have been fighting for years, the reason that peace is not easily obtainable is because they view the problems and the solutions differently because of their culture and history. Palestine and Israel will most never find peace, not because the people actually hate each other, not because the sides want war and not because of land, it is their cultural difference, it is their viewpoint and their perspective that is different.

This has become very evident recently in the battle between President Sakozy and Chancellor Merkel. They can ageed on the problems, they can agree on the solutions, but when it comes to the fine points and the decisions, they bump heads.

Surrendering sovereign powers, including the Parliament’s mastery of the budget process, would amount to a risky political gamble for Mr. Sarkozy five months ahead of France’s presidential election next spring. For its part, France has insisted that deeper integration also should yield increased solidarity.

The chancellor wants to focus on what she sees as the root causes of the crisis by creating a long-term regime of fiscal discipline, while changing the European Union’s treaty to give European authorities new powers of enforcement.

In a speech to Germany’s parliament on Friday, she warned that euro members would have to accept a loss of national sovereignty, and that there is no quick fix to the crisis.

In the past week, we have heard from the President of the ECB, from the Director of the IMF, from Chairman of the Bank of England. Everyone is prepared to assist to find solutions and offer assistance. The IMF was able to get pledges from most of the G20 nations. China has decided to assist the IMF. Central Banks from around the globe joined forces this week to aid the EU banks to maintain liquidity until the December 9the EU summit.

Towards the end of the week, there was rumor and announcements, statements and press that Merkel and Sarkozy were able to find a path. David Cameron from the UK met with the leaders on Friday and insisted that they find a way to resolve the EU debt crisis. And to discuss the possiblitly of rewriting the EU treaty that covers each country as a member of the EU. Mr. Cameron was there to represent the UK and other nations that are part of the EU but are not part of euro currency, to make sure they were not pushed to second place. There are pressures on the EU from all directions.

But the most powerful leaders of the EU are still at odds. On Friday Chancellor Merkels speech and the statements from President Sarkozy seemed to take almost opposite positions.

On Monday the markets will react to this new uncertainty. Markets soared from midweek on the news of agreements, understanding and road-maps. But it seems that the news was premature, as the IMF and the ECB can not act without the EU.

This is plan number 12.. its their last chance to get things right.

 

 

EUR/GBP Forecast for the Week of December 5, 2011, Technical Analysis

The EUR/GBP pair fell for the start of the week, only to have the market bounce again over the last several sessions. The pair formed a hammer at the end of the week, and this was preceded by a shooting star. This shows how conflicted traders are in this market presently. The pair is simply a battle between two very ugly currencies, and should continue to be choppy at best going forward. Because of this, we are not trading this pair for longer-term trades at the moment.

EUR/GBP Forecast for the Week of December 5, 2011, Technical Analysis EUR/GBP Forecast for the Week of December 5, 2011, Technical Analysis

EUR/GBP Forecast December 5, 2011, Technical Analysis

The EUR/GBP pair rose during the session on Friday, but gave up most of the gains by the end of the session. The resulting candle looks like a shooting star, and we see this as a short-term opportunity that could produce another fall down to 0.85 in the meantime. The breaking of the bottom of the Friday range is a bearish enough sign to have us short this market.  We aren’t interested in buying the Euro at all currently.

EUR/GBP Forecast December 5, 2011, Technical Analysis EUR/GBP Forecast December 5, 2011, Technical Analysis

A BIT OF A PLAN FROM THE ECB… but not the ROADMAP that was PROMISED

A week or so ago European Central Bank President Mario Draghi, assured the world that he would have a “roadmap” prepared and ready to present at the December 9th meeting of the EU. Yesterday, Draghi, began to release some of the details to assure the markets and the politicians that the ECB was taking positive action to resolve the issues facing Europe. Yesterday, simultaneously David Cameron was meeting with Sarkozy and Merkel, to pressure them on several matters. One was to reiterate the need for decisions and guidance, no more talks and meetings. He also stressed the need for austerity measures; just bailing out countries would not help Europe. Good budgeting and good finances are required. Cameron also was in serious talks regarding new policies and requirements that the EU would be placing on member states. Cameron wants to make sure that the UK is not given a second seat to France and Germany.

The Central Bank President only assumed his role last month and this is his first appearance and public statement. He called on euro-zone governments to quickly craft a “new fiscal compact,” calling it “the most important element to start restoring credibility.” He added that “other elements might follow, but the sequencing matters.”

“There cannot be a single currency without economic convergence,” he said in the southern French city of Toulon. “Or the euro zone will explode.”

Mario has come intense pressure from politicians to commit to massive purchases of government bonds in order to stabilize yields and give governments time to enact convincing deficit reduction. The ECB bond purchases can bring down countries’ borrowing costs, making it easier for governments to refinance debt.

The European Central Bank so far has resisted the pressure, keeping purchases in the €5 billion to €10 billion ($6.7 billion to $13.4 billion) range each week. This has been enough to keep the borrowing costs of Italy and others from spiraling out of control. Bond yields in country after country, not only the debt-plagued nations on Europe’s southern periphery, have been hitting.

Mr. Draghi stopped short of promising unlimited purchases of euro-zone bonds, as a number of European policy makers have recently demanded, but his comments nevertheless raised the prospect that the ECB is willing to do significantly more.

France and Germany, and euro-zone nations are working on new rules that would make budget discipline binding and enforceable by European authorities—possibly shortcutting the laborious and uncertain process of amending existing treaties. ECB officials welcomed the emergence of such a plan over the weekend, saying it would address “moral hazard” concerns.

Despite Mr. Sarkozy’s statements Thursday, there is still disagreement on how far to go—including between him and Chancellor Merkel. Economists said Mr. Sarkozy’s specific proposals may fall short of Germany’s demands for full fiscal submission to a euro-zone budget supervisor.