Traders increase bets on European Armageddon

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It has become clear that our belief that the Federal Reserve’s Operation Twist should not be a distraction for the perilous position of European finances is correct and this was born out in market moves yesterday. Equities, and risk in general, was absolutely battered as it seemed that market participants wanted shot of everything apart from the US dollar and US government debt. Cash is king at the moment I guess.

Recession concerns were exacerbated by Chinese and European PMI surveys that showed that both manufacturing and services sectors are slowing with new orders, expectations of future purchases, were sharply lower and left people wondering where growth is likely to come from. Eurozone consumer confidence was also lower but I doubt you need me to tell you why.

The slide yesterday really started in the French banking sector with headlines such as “French banks could tip Europe back into a full-blown crisis” according to Mohamed El-Erian in the FT and rumours that BNP Paribas were casting around the Middle-East for additional funding. These rumours were later denied although they remain persistent. With all the uncertainty rolling round it was obvious that markets were going to get smashed.

While we are talking about bank recapitalisation the FT is reporting that European governments are planning to speed up action on refunding of 16 banks that came close to failing the EU stress tests, but the European Banking Authority denied this claim and said there is no acceleration of the agreed timetable. A lot of rumours, a lot of uncertainty.

Today we have the annual meetings of the World Bank and the IMF starting in Washington with a lot of focus being put on comments from Christine Lagarde. Overnight they said that the global economic situation was entering a “dangerous place”. For the normally placid IMF this is flamethrower language and has added to traders’ fears in the Asian session with equities continuing lower overnight. We have seen some language from the G20 pledging to help overnight but in a market thriving on doubt, vagueness is about as useful as a chocolate fireguard.

More of this is expected today unfortunately and a lot of people have not been hedging. In conversation with a lot of people in the markets over the past 24hrs the only common theme has been “we’re not sure about how long this will last”. This uncertainty means hedging is what is required in the short term; protecting your budget means protecting your business.

Indicative Rates Sell Buy
GBPEUR 1.1400 1.1427
GBPUSD 1.5409 1.5432
EURUSD 1.3500 1.3522
GBPJPY 117.46 117.73
GBPAUD 1.5718 1.5744
GBPNZD 1.9696 1.9728
GBPCAD 1.5818 1.5846
NZDUSD 0.7809 0.7830
GBPZAR 12.80 12.85
USDZAR 8.2955 8.3427
GBPPLN 5.1105 5.1516
EURJPY 102.85 103.10

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