Tag Archive | "Upturn"

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Germany And France Data Prompts Equities Growth

Good news from Germany and France lifted the euro zone out of a prolonged 18 month recession and broadly boosted European equity markets. Germany’s critical economy posted a 0.7 percent growth rate in the second quarter. GDP expanded due to strong spending within the country and with better exports than expected. Public consumption has been slow during the past 18 months but the new data reflected a new and stronger consumer sentiment in Europe’s largest economy.

Meanwhile, in France, the economy posted 0.5 percent growth during the second quarter. Both countries surpassed the US growth of 0.4 percent. The gain marked France’s biggest upturn since early 2011.

Olli Rehn, the Commissioner of the European Economic and Monetary Affairs, announced a euro zone gain in GDP of 0.3 percent in the second quarter. This gain comes despite obvious struggles in the region’s southern tier, particularly in Spain, Italy, Greece and Cyprus. Rehn was quick to point out that while this is a positive step, the recovery as extremely tenuous and political dissention and economic policy shifts could reverse the positive trend.

German Chancellor Angela Merkel and France’s President Francois Hollande were quick to move center stage alongside the new data. The political leaders have had opposing opinions about the relationship between austerity and growth. The common thread in the euro zone currently is that growth must always be given consideration. The effects of the region’s sharp austerity programs seem to be easing in countries other than in the southern tier.

One austerity nation in the southern tier, Portugal, who has served as a role model of sorts, saw its GDP grow 1.1 percent, the largest gain in 3 years. Even Spain, which has been the center of bitter internal and external controversy improved its GDP but still came up short with a 0.1 percent contraction.

Euro zone bad boy, Greece, is enduring its sixth consecutive year of recession. Contraction is projected at about 0.25 percent this year. Meanwhile, island nation Cyprus, still reeling from the banking scandal earlier this year, saw the economy shrink about 1.4 percent in the second quarter.  Data has not been released from Italy but preliminary projections are not optimistic.

On the downside, most analysts feel the growth will be difficult for European countries to sustain for the rest of 2014. Sustained growth is projected to begin in 2015.

Another European Union member that posted stronger than expected employment data was the UK. A sharp downturn in jobless claims in the UK pushed sterling to $1.5519, up 0.5 percent. Speculation as to whether interest rates would continue to be linked to unemployment immediately followed. There is strong support for a rate hike by the Bank of England (BoE).

Strong GDP growth was posted in Czechoslovakia who posted a 0.7 percent gain and marked the end of a prolonged recession.

Despite the positive economic data, the euro gave some ground against the dollar to $1.3252, a 0.1 percent fall. The dollar lost ground to the yen at 98.18 yen. The US 10-year note yield hedged a little to 2.7154, off Tuesday’s high of 2.72 percent.

Trading is light in US markets. Uneasiness about Federal Reserve policy is the main factor but with Congress on vacation and many investors breaking for the month, trading has been light.

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Euro Zone GDP Contracts Further

The 17-nation euro zone output shrank by 0.2 percent in the first quarter 2013 creating the longest recession in the bloc’s history. Projections for the future are not promising. Analysts project slight growth in late 2013 but no significant upturn until 2015. The first quarter contraction marks the sixth consecutive quarter that euro zone GDP has contracted.

France which has been teetering on the edge of a recession finally crossed the line and suffered a 0.2 percent downturn, equaling its output in the fourth quarter 2012. Unemployment in France is at record levels.

France joined the list of euro zone economies in recessions. Finland, Cyprus, Italy, The Netherlands, Portugal, Greece and Spain are solidly entrenched in recessions. Italy and Spain, the euro zone’s third and fourth largest euro zone economies, have endured seven consecutive quarters of negative growth.

The new data pushed the euro below the 1.29USD mark. The currency fell to six-week lows and shows little hope for recovery. The trend of the euro and the anemic growth in the bloc may prompt the ECB to engage in more aggressive monetary easing initiatives.

Last week, the ECB cut interest rates to historic lows. However, Mario Draghi, ECB president, has said that he is not opposed to another rate cut.

Austerity vs. Growth

To a degree, German led calls for austerity have stabilized the euro zone treaty. But, most of the nations want to shift the focus to growth. Euro zone unemployment is estimated to include more than 19 million workers.

The consensus is that the natives of the euro zone have been pushed about as far as they can go. France has been an advocate for growth and has marked the formation of a Europe-wide banking supervisor as an important step in the region’s recovery. German finance minister Wolfgang Schaeuble and Chancellor Angela Merkel have opposed this new initiative fearing that Germany would have to bear the heavy load.

On Tuesday, Schaeuble appeared to soften his position, suggesting that the new, broader banking union could be structured by June. A second aspect of this initiative would call for identification of banks that need to be closed. Schaeuble told French finance minister Pierre Moscovici that the new banking union was a “priority object.”

Germany, always the pillar of the euro zone, is facing its own manufacturing, export and GDP problems. GDP was revised from negative 0.6 percent in the fourth quarter 2012 to 0.7 percent. Germany narrowly avoided falling into recession by posting a 0.1 percent gain in the first quarter 2013. Despite its tempered growth, Germany enjoys the lowest unemployment rate in years.

Liquidity Driving Equity Markets

The euro is off 2.3 percent in May, hitting 1.2883USD in overnight trading. The dollar rests comfortably in the 102 range against the yen. The ECB is likely to consider another rate cut before the end of the year. The dollar reached 102.63 yen overnight.

Meanwhile, the Federal Reserve and the Bank of Japan continue to pour money into easing programs. The weak yen is very liable to cause more export stress in Europe.

The UK has been damaged by the weaker euro and the stronger pound. UK exports have lowered to Europe but have increased to other markets like Southeast Asia and Africa. Outgoing Bank of England head, Mervyn King hinted that the BoE may be softening its easing program shortly. King put forth the first positive outlook for the UK since the outset of the financial crisis. Britain has been successful encouraging small business growth but still fights high unemployment and a slumping housing market.

All eyes will be on Italy’s upcoming 30-year bond auction after Spain had a successful 10 billion euro sale of its 10-year bonds on Tuesday. After Fitch Ratings upgraded the nation’s sovereign debt, a positive accomplishment, Greece’s 10-year bonds surged in Wednesday’s auction. Greece is no longer viewed as a country about to leave the euro zone, a credit to the tough love imposed by Germany.

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$1 Trillion EU /IMF Bailout – No Sure Cure For Euro

By Tuesday morning, stern questions surrounding the EU – IMF euro zone rescue plan had already begun to surface.  The $1 trillion bailout package for the 27-member euro zone, which prompted a global upturn in equity and money markets on Monday, fell under closer scrutiny and skepticism rose quickly as the overall consensus seemed to be “too little, too late” for the euro and perhaps the EU.

The EU-IMF’s nuclear rescue package was unveiled by European Central Bank President Jean-Claude Trichet on Sunday night.  Under the agreement, the EU will contribute 500 billion euros and the IMF will add another 250 billion euros to complete the bailout package.  An additional $100 billion for Greece has already been committed.

By Tuesday, pressing questions about how politics will play out as the package unfolds arose.  Just about every nation in the region needs austerity cuts to meet the EU’s stringent standards.  Under attack are the size of government, unrealistic benefits to public employees, and disparity among retirement ages.  These cuts are political nightmares. 

In Greece, socio-economic changes incite the public and influence politics.  As evidenced by the bloodied streets of Athens and the electoral defeat of German Chancellor Angela Merkel, the bailout, the fate of the euro and the fate of the European Union mean less to the public than their existing lifestyles.  Any euro zone nation seeking aid will have to undergo austerity cuts similar to those of Greece.   

The media consensus is that the bailout package along with the previously committed $100 billion allocated for the bailout of Greece will stem the current tide but may not provide the spectacular, long-term solution the region needs to right the euro.  At some point soon, government operating costs must decrease and sales must increase in order for the ECU to survive.

As the EU and the IMF struggled to put the pieces of the bailout together, global markets closed Friday with a wait and see attitude.  The size of the EU – IMF commitment is impressive and the euro rose sharply on Monday only to fall back on Tuesday.  By midday, the euro stood at $1.273 against the dollar. 

The Benefits of The Bailout

The most immediate benefit of the package is the stabilization of world markets and the time that has been bought for member nations to toe the austerity line.  Opponents of the move content that outside influences impacted the EU – IMF decision.  The reality is that action was needed and sooner rather than later.  

A secondary benefit is that Greece has a financial reprieve.  However, the government is left with strict mandates to get spending under control and trim debt to 3% of GDP.  Currently the rate exceeds 13.9% of GDP.  On Monday, Greece’s cabinet approved major changes in the pension system and raised the retirement age from 60 to 65. These changes are imposed by the EU as a condition to financial assistance.  On Tuesday, Greece approached the ECB to request immediate assistance.

The austerity plans for Greece are complex and multi-dimensional.  Public retirement ages have been raised, benefits will be trimmed and services cut.  Any other EU nation needing financial assistance will find stringent austerity cuts attached.  The hope is that governments will begin to act now to remedy their large deficits.  Troubled economies in Spain, Portugal, Italy and Ireland now have time to impose the cuts necessary to close the gap between sovereign debt and the GDP. 

On Monday, Greece’s cabinet approved major changes in the pension system and raised the retirement age from 60 to 65. These changes are required by the EU as a condition to assistance.  On Tuesday, Greece approached the ECB to request immediate assistance.

The European Central Bank announced that it would begin to buy euro zone government bonds to help stabilize markets.  This action is a reversal of form as the ECB has only participated in full-scale asset purchases in the past. 

Trichet explained his view of the package.  “For us, what is absolutely decisive is the commitment of governments of the euro area to take al measures needed to meet their fiscal targets this year and in the years ahead.”

Always the master of understatement, Trichet is guiding the EU through its most challenging period.  The true benefit of the bailout package is that it buys time for the member nations.  Members are certain to see a more proactive governing body and there are many details yet to be resolved, but for the time being, the euro is still in business.

The Weaknesses of The Bailout

There are many skeptics who question the prudence of the bailout that basically has taxpayers from Germany paying for years of fiscal irresponsibility by other nations.  The availability of the money may give politicians in the zone’s most troubled economies more breathing room to implement the very necessary and much needed spending cuts.

Trichet’s announcement was accompanied by a warning to member nations that it is now time to make those heavy cuts.  No euro zone nation is compliant with the debt to GDP ratio that was at the core of the EU’s foundation.

“This is a big plaster and there’s a lot of work to do in terms of getting these budget deficits under control and it’s also a reminder that the financial sector isn’t in great health,” offered Marc Ostwalt of Monument Securities.

Critics suggest this is the age-old shill game but throws good money after bad.  The $1 trillion package may only last until 2012 unless cuts are enacted quickly.  Germany and Spain have committed to begin trimming immediately.

The package and the ECB’s decision to pump money into the system will temporarily end the liquidity crisis and dampen speculators.  European laws do not permit the ECB to purchase debt directly from governments in the way the U.S. Banks did.  The ECB is permitted to participate in secondary markets.

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Is The U.S. Dollar Under Attack?

Britain’s newspaper, The Independent, reported on Tuesday that Gulf Arab states, Japan, Russia, China and France were negotiating behind the scenes to replace the U.S. dollar with a basket of currencies in future oil trades.  Citing unnamed Gulf Arab and Chinese banking sources, reporter Robert Fisk’s articles caused a sharp upturn for the Euro, which edged as high as $1.4749 in European trading before the report was discredited.

The tenuous dollar still gave way to the Euro, which settling at $1.4701 against the dollar.  The weaker dollar and anticipation about Wednesday’s U.S. earnings reports sparked another strong rally in U.S. equity markets.  By Tuesday afternoon, Gold cleared the $140.00 barrier and hit an all-time high as U.S. equities rose another 131 points.

Fisk’s story set off a firestorm of public and private reaction.  The report was quickly denied by Algeria, Russia, Saudi Arabia and the United Arab Emirates.  Muhammad al-Jasser, Saudi Arabia’s head of the Central Bank labeled the report, “absolutely incorrect.”

Russian finance minister Dmitry Pankin added; “We did not discuss this at all.”  While the story seems baseless, there is a general uneasiness about the reeling dollar.  Stretched by abundant forms of quantitative easing and with overwhelming trade and budget deficits, the American dollar remains under pressure.

Meanwhile, other economies appear to be forging their way out of the recession.  The concern is that the U.S. is headed for another downturn before the recovery gains a foothold.

Fisk’s report mapped out a strategy that crude oil trading would convert to a basket of currencies including the Japanese yen, the euro, the Chinese yuan and a new, unified currency of the Gulf Cooperation Council within nine years.

IMF in Istanbul

On several occasions, Russia and France have publicly encouraged a shift away from the dollar for oil trading.  The currency’s volatility has also caused China, the holder of the largest foreign exchange reserves, to support a change.

While the talks among IMF members have been addressing global trade imbalances, the key to sustained balance may well be the further devaluing of the dollar.  David Moore, a commodities expert with the Commonwealth Bank of Australia explained; “I don’t think we will see much concrete action out of such discussions because even when the dollar is weak, it doesn’t mean that commodities are undervalued.  In fact, when the dollar weakens, commodity prices tend to increase by a higher ratio.”

Such a conversion presents many practical issues.  Many financial ministers agreed that it is already difficult to convert to a single currency much less a handful of options and conversion rates.

Several analysts countered by pointing to Iran as an example of a country that has been able to make a fairly seamless transition away from the dollar.  However, most analysts thought the process more laborious than worthwhile.

Strong Message From Australia

The Reserve Bank of Australian (RBA) sent a clear message that the country has emerged from the recession by increasing its cash rate by 25 basis points to 3.25 percent.  The Bank indicated more increases were in the offing.

The Australian dollar immediately jumped to a 14-month high.  Asian currency banks seemed to be ready for strong moves as several economies moved to pull back from quantitative easing. 

The surprising move by the RBA made Australia first Group of 20 bank to hike rates.  The bank indicated a desire to increase rates to 4 percent over the next few quarters and hopes that rate would reach 5 percent by 2011.

The Australian economic recovery and real estate markets have been bolstered by the country’s strong banking presence.  Treasurer Wayne Swan said: “The Australian economy is outperforming other advanced economies and I guess many economists will see the decision today as a consequence of economic recovery.”

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