UK
Sterling rallied against the euro yesterday hitting a new high of 1.2544 very close to the two year high set a few weeks ago of 1.2575. Sterling looks set to continue to be supported against the euro as investors look for an alternative to the European single currency.Against the US dollar sterling lost ground, falling to a 4-month low as concerns about the health of the European economy, and in particular the Spanish banking system pushed investors to safe haven currencies.
UK data on Wednesday showed Britain’s property market picking up in April. UK mortgage approvals rose well above forecasts to 51.8k in April from 51.07k in March and Net mortgage lending grew by £1.139bn. Also above expectations and the biggest increase since January.
Money supply M4 growth also rose 0.7% month-on-month in April, up 3.8% from a year ago and its highest since first quarter 2009.
A positive day of data for the UK yesterday could help to BoE members to swerve away from additional quantitative easing at their meeting next month, although unless the data continues to improve it cannot be ruled out completely.
UK home prices rose in May, supported by a lack of residential property for sale, mortgage lender Nationwide revealed this morning. On average prices rose 0.3% from April and fell 0.7% compared with a year earlier. In April, home prices fell 0.3% on the month and by 0.9% in annual terms.
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WORLDWIDE
The euro fell to the lowest in almost two years against the US dollar as Spain struggled to rescue its troubled banks, adding to signs the European debt crisis is spreading to the region’s larger economies. The US dollar pushed through key resistance at 1.24 and EURUSD fell to 1.2383, a new two year high, before losing a little ground later in the session, closing at 1.2408.
Concerns are growing that Spain may be forced to seek an international bailout. Ten-year Spanish bond yields are trading above 6.5%, dangerously close to the 7% level beyond which borrowing costs are deemed unsustainable over the long-term.
US benchmark boring costs plunged to levels not seen since 1946 and those for Germany and the UK and hit all-time lows as investors took flight to safety in response to the debt crisis across Europe.
With risk appetite drying up the Japanese yen and US dollar strengthened as investors sought safer assets after a European report showed economic confidence dropped more than economists estimated in May. The euro fell for a seventh day versus the yen, the longest losing streak in four months, after Italy sold less than its maximum target at a debt auction. Spain has taken the focus away from Greece in the short term with investors concerned that a much larger piece of the European economic pie may be in trouble.
Investors are resigned to more turmoil until EU policymakers take more radical decisions. This could come in the form of either the ECB buying Italian and Spanish bonds on an unlimited basis or even Eurozone countries agreeing to a fiscal union by pooling all debt. Spain is too big for half measures so the next move from EU leaders will have to show total commitment to avoid a complete crisis
Amid the European crisis the 8 nations that are waiting to join the euro have been told by the ECB that they are not ready. Bulgaria, the Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania and Sweden are not yet ready to join the 17 nations that use the euro. Some would say given the current situation, this is a lucky escape.
Australia’s bonds rose and its currency touched a six-month low as concern Spain will struggle to rescue its banks curbed demand for assets linked to growth.
This morning German Retail Sales hit a 9 month high rising by 0.6% versus the 0.0% expected helping the euro to recover from its lows in early European opening trade. On a year on year basis however, retail Sales declined by -3.8%.
