IFX Market Report for 27/07/2012

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    Sterling recovered yesterday against all except two of its 16 most traded counterparts as risk appetite increased, gaining over 1.5% against a weakening US dollar yesterday after comments by ECB president Mario Draghi surprised markets and boosted risk appetite with investors. The pound moved from the morning low of 1.5470 to reach the high of 1.5723.Against the euro the pound started morning trade at the low of 1.2730 before reaching the high of 1.2793 before Draghi’s comments, the euro then gained ground to end the session around the 1.2760 level on the back of the euro rally.

    Mervyn King yesterday spoke at a global investment conference stating that regulators need to restore confidence in the financial system and ensure that it serves the real economy; confidence in the financial system is currently damaged and without confidence finance is nothing. Mr King said London should continue to aspire to finance a vibrant and expanding global economy yet he didn’t discuss UK monetary policy in his remarks.

    Chancellor of the Exchequer George Osborne came under renewed criticism after Britain’s recession deepened in the second quarter, prompting questions about his economic plans and whether he should remain at the Treasury (we think surely Osborne is a better option than Cable).

    Osborne’s 2010 austerity program, which was extended for two years in November, envisaged that the economy would be growing by 2.8% this year. Instead, it is 0.9% smaller than in the third quarter of 2010, just after Prime Minister David Cameron’s coalition came to power, and is struggling to overcome aftershocks of the 2008 banking crisis and the Eurozone debt crisis.


    Draghi spoke yesterday and repeated his stance that the euro is irreversible, adding that if the level of bond yields hampers the transmission of monetary policy, it comes within the remit of the central bank to take action. “The ECB is ready to do whatever it takes to preserve the euro,” The statement suggests the ECB may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency.

    Economists now believe the comments suggest the ECB may be preparing to unveil new measures to fight the crisis as potential bailouts for economies the size of Spain and Italy threaten to overwhelm Europe’s rescue funds. Spanish politicians have called on the ECB to do more after yields on the country’s bonds soared to euro-era records this week.

    French Finance Minister Pierre Moscovici welcomed the comments made by Mario Draghi which suggest the central bank may be ready to embark on new measures to bring down borrowing costs for highly indebted euro-zone countries.

    A report by the Organization for Economic Cooperation and Development said the Portuguese economy will contract by 3.2% this year more than the government is forecasting, but the country should continue its efforts to meet this year’s budget target to restore confidence and control public debt.

    The Euro rallied 1.4% to a 2 week high of 1.2327 against the USD, but the relief rally in the EURUSD could be short-lived as the fundamental outlook for the region turns increasingly bleak. This is not the first promise from the ECB to intervene so unless vast action is really taken this new found optimism will fade quite quickly.

    The Irish government returned to the bond markets after an enforced absence of almost two years yesterday, marking an important step in its rehabilitation after suffering the ignominy of a bailout in 2010 and providing a rare hint of hope for the euro zone. They managed to sell EUR 4.19bn of new five year bonds at an average yield of 5.90%.

    The Swedish krona strengthened against both the euro and dollar after better than estimated unemployment data and a rise in consumer confidence reduced speculation about an interest rate cut in September.

    The number of U.S. workers filing for unemployment benefits fell for the fourth time in five weeks, continuing to suggests that the labour market is finally gaining strength. Initial jobless claims fell by 35,000 to a seasonally adjusted 353,000 in the week ended July 21.

    US Manufacturers orders for durable goods, meant to last at least three years, jumped by 1.6% in June to a seasonally adjusted $221.63bn. Manufacturing has played a key role in the US recovery, though there are signs the sector is slowing as U.S. consumers remain cautious and demand from overseas fades.

    Japan’s core consumer price index fell 0.2% in June from a year earlier, citing the effect of falling gasoline and other fuel prices. The figures show that the Bank of Japan faces hurdles as it seeks to reach its price-rise goal of 1% and help haul Japan out of its deflationary state.

    Daniel Fountain / 26.07.2012

    Editor, Hotel Designs


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