The referendum will revolve around nothing less than the question : does Greece want to stay in the Euro; yes or no”. This is what German Chancellor Angela Merkel said after lengthy discussions before the G20 summit begins in Cannes today. There is still some confusion however on when the referendum will be held. Originally it was planned for January however with Greece effectively running out of funds by December it is now thought that this will be held on December 4th or 5th. Financial aid has been cut off to Greece until then. It’s make it’s mind up time for Greece. Papandreou has again added to the confusion on what the referendum question will involve saying “it is not the moment” to give the exact language, only that “the question is not about just the program, but do we want to be in the Eurozone”. Will the Greek people be asked to vote on austerity measures/the bailout plan or simply membership to the Euro? Who knows. We yet again lurch from one set of problems and unanswered questions to another. I’d love to say all will be resolved at the G20 meeting and we’d get some clarity however that’s wishful thinking. Now all attention turns to December 4th/5th so expect more comments/promises/assurances/pledges in the interim.
Overnight we’ve seen a EUR/USD retracement back below 1.37 on the continued confusion on the Greek situation. The dollar rose slightly after the FOMC statement last night however reaction was subdued to Bernanke and the Fed. They left the monetary outlook unchanged however Bernanke did remark that the Central Bank will do more if necessary. The US economy is still struggling with growth and although it has strengthened “somewhat” they expect moderate growth in the future with many downside risks to the economic outlook. The Fed have reduced their GDP outlook down to 1.6% for 2011 (down from 2.7%) and they see 2012 GDP at 2.5% to 2.9% (revised down from 3.3% - 3.7%). I think these projections are optimistic and we’ll see a further downward revision. However, some of the headwinds for the US will be eased should the Eurozone get it’s act together and you could see growth in the US accelerate should their be a satisfactory conclusion to the Eurozone debacle. The US unemployment rate will stay above 8% in 2012. For a country the size of the US this is still extremely high. Tomorrow we have the NFP figure out (Non farm payrolls) and should the ADP report be anything to go by then we could see a continuation of the positive data recently released. The ADP reported yesterday that the US private sector added 110k jobs compared with an expected rise of 101k.
I see EUR/USD coming under further pressure today and tomorrow. It consolidated in yesterdays trading however overnight it came off on Sarkozy’s comments at around 23.15 last night that Greece wouldn’t receive “a single cent” until austerity measures were implemented and the referendum is concluded. Merkel also warned of the need to be prepared for a Greek exit from the Euro. I think this is now a real possibility. In recent days the markets have been trading on commentary and sentiment. There are days when data comes out and the markets move in the direction broadly as they should. These days seem to be getting scarce. As a lot of the moves happen overnight you should think of utilising market orders if you haven’t already done so. With moves of sometimes as much as 1% in a 24 hour period you could achieve a far better rate of exchange. Please contact to discuss this in depth.
The focus today, you guessed it – Europe. We have a key interest rate decision from the ECB that investors will be waiting for. Expectations are for this to be left unchanged at 1.5% so that sluggish growth can be given some support and stimulate recovery whilst keeping inflation in check. The ECB’s job today will be to calm all the jitters that are emanating out of the Eurozone. Although the expectations are for the status quo however with incoming President Mario Draghi there may be a surprise. It’ll be interesting to see the tone Draghi sets with various analysts suggesting that he may cut borrowing costs. I think however he’ll set the tone for a rate cut in December.
At the G20 meeting there will be a whole host of issues discussed. One of these will be the BRIC economies and their willingness to support the IMF in providing funds through the rescue fund. They are ‘open’ to this however with all the uncertainty would you put your hand in your pocket and give to the EU at present with minimal assurances of a return? I think not. China is the best option however until there is more clarity I don’t expect any funding to be provided. Even if they do, it’ll have to be one almighty injection as I don’t think 1 trillion EUR goes anywhere near covering the debt that countries such as Italy currently hold.
Expect a very volatile day today with the G20/ECB rate decision and press conference being held. With non farms out tomorrow we’ll potentially see some major market moves. Sterling is largely out of the headlines for the time being as the Eurozone is the focus. This is no bad thing for GBP at present and we’re at good levels versus the EUR and USD.
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