Fiddling while Athens, Lisbon and Rome burns

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C’mon guys this is getting silly now. Yesterday’s meeting of EU finance ministers ended in a bit of a farce really with participants needing more time to come to a workable decision on Greece. What this comes down to however is a probable delay in the payment of the next IMF aid tranche.

The euro is behaving like a man with a bad heart at the moment; all these little shocks to the system are going to end up in a massive coronary. The single currency weakened further overnight on this news, moving back above 1.17 against the pound and below 1.32 in EURUSD. It was also not helped by speculation in the FT Deutschland that George Papandreou, the Greek Prime Minister, was considering stepping down. According to his spokesman this is rubbish but the damage had already been done and the euro slid.

I hope that the powers that be in Europe soon come to the realisation that Greece is finished. No amount of money and bargaining will save the country’s economy in the short term. From an investment point of view it seems that the EU are risking 98% of the European economy to save roughly 2% of it. Anyone who has ever invested will know that this is not a risk/reward ratio that makes sense, unless you’re investing billions in the EU apparently. We are still looking for a Greek default by December.

Yesterday afternoon, just as George Osborne took to the stage at the Conservative Party Conference in Manchester, a flash came across my trading screens… “S&P AFFIRMS UK AAA; OUTLOOK STABLE”. Convenient timing for George Osborne if there ever was one. The ratings agency called the UK a “wealthy, open and diversified economy, supported by a well-established political system and macroeconomic policy framework”. They tempered this by suggesting that the economy would only grow by an a average of 1.8% between 2011-14, as opposed to the Office of Budgetary Responsibility’s expected 2.5%. The stable outlook (i.e. no ratings action planned) is as a result of their expectation that the coalition will implement the bulk of its expenditure-led fiscal consolidation program, which will eventually allow the debt to GDP ratio shrink back to a sensible level. This does not mean that we are out of the woods, however, as the UK’s ratings could come under downward pressure if, against expectations – and perhaps in response to weakening growth prospects – the coalition governments’ commitment to fiscal consolidation falters.

We also had some good news from the UK in the form of the Manufacturing PMI number that broke a run of 8 consecutive declines and is now showing that the sector is expanding albeit only slightly. Obviously this is in direct contrast to the Eurozone with its figure slipping further into the red. While one swallow does not make a summer this will further increase the belief that the UK is a safe haven from the upcoming financial storm. It will also act as an early sign that the softness seen in Q3 may not be perpetuated through Q4, although it is very early days.

Overnight we saw further weakening in Asia as the Reserve Bank of Australia indicated that it is ready to move interest rates lower if needs be. The bank noted that commodity price inflation has slipped in the past month but prices still remain high. The Aussie dollar has remained sold overnight as a result.

Given the Punch and Judy show across the Channel investors will be keeping a very close eye on the 2nd day of meetings between finance ministers. The data calendar is quiet that apart.

Indicative Rates Sell Buy
GBPEUR 1.1695 1.1721
GBPUSD 1.5423 1.5449
EURUSD 1.3173 1.3197
GBPJPY 118.15 118.43
GBPAUD 1.6255 1.6282
GBPNZD 2.0442 2.0471
GBPCAD 1.6269 1.6295
NZDUSD 0.7540 0.7560
GBPZAR 12.72 12.77
USDZAR 8.2386 8.2794
GBPPLN 5.1424 5.1718
EURJPY 100.94 101.20

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