Hope rally starts to fade

andres del risco

It looks like risk is once again off the table this morning with a division at the heart of the Eurozone the most likely reason why. The FT is reporting that as many as 7 of the 17 EU member states want harsher haircuts, losses on government debt, imposed on the private sector. Members such as France and the ECB are opposed to these further losses however as they believe that it would prompt further runs on bank shares and exacerbate funding fears in the financial sector.
The euro has remained roughly where it was at yesterday’s close however although equity markets are being called around !5 lower at the open.

Indeed the single currency did calm down, to a certain extent, yesterday on the belief that the radical EUR 2 trillion bailout plan would finally deal with the debt crisis. We have a couple of problems with this plan. Firstly it is leveraging debt; only those with the shortest of memories will have forgotten that it was the packaging and leveraging of debt that got us into trouble in 2008 in the first place. Secondly, both the Spanish and the German Finance Ministers have come out and said that this plan is not being talked about it at the moment with Wolfgang Schauble calling the proposition “silly” and warning that it could result in Germany losing its AAA status. A German government spokesman also said that “Germany has no plans for European Financial Stability Fund expansion beyond the July 21st deal” i.e. if Germany isn’t going to pay, nobody is.

Risky assets have not reacted to this yet however but it may hang over any further gains and to be honest only gives us further scope for disappointment going forward.

Support was found in the Greek parliament yesterday as the vote to pass the unpopular property tax went through without too much of a hiccup. The solidarity shown by PASOK members will have galvanised things in the short term but political solidarity is more wobbly than a big bag of jelly.

There are also rumblings that the “Robin Hood Tax” or Tobin Tax will be introduced by the EU later today. This is a tax on any and all financial transactions with the proceeds apparently heading to the EU budget. No percentages have been mooted yet but this is a bone of contention between the EU and UK with the British government threatening a veto unless Britain was allowed to opt out. Further details will be published.

The data calendar is filled with German data today. The most important are the inflation numbers, with any drop in prices making it all the more likely that we will see a rate cut from the ECB sooner rather than later. We also have the latest durable goods orders figure from the United States which are expected to show a 0.5% fall after an exceptional August number.

Indicative Rates Sell Buy
GBPEUR 1.1494 1.1519
GBPUSD 1.5657 1.5681
EURUSD 1.3604 1.3627
GBPJPY 119.68 119.97
GBPAUD 1.5781 1.5810
GBPNZD 1.9875 1.9905
GBPCAD 1.6001 1.6032
NZDUSD 0.7865 0.7887
GBPZAR 12.23 12.28
USDZAR 7.8014 7.8478
GBPPLN 5.0353 5.0648
EURJPY 104.00 104.26

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