Foreign Exchange market weekend review
Posted by Darren Hutchinson on Mon, Aug 30, 2010 @ 06:52 AM
In our world, the Bank Holiday weekend was dominated by actual concrete policy actions coming from Japan. In line with what has been reported in a variety of media, liquidity operations have been increased in both duration and size. Elsewhere, further
noises about the ECB extending their liquidity operations. Given European Bank’s financing challenges in the next 18-months, Trichet’s expected announcement of an extension of weekly, monthly and 3-monthly operations is both necessary and significant. Munchau was in Monday’s FT with another very bearish article on the future of the Eurozone, this time doubting the wider sustainability of Germany’s recent monster numbers. As ever, the effects of deficit reduction dominate the UK papers. This week sees the beginning of the “star chambers” of fiscal consolidation, where departments will present their plans for cutting as much as 40% of their budgets. Also starting to see a trickle of M&A activity. Not widespread but accentuates the divide between micro-outperformance and concerns over the macro outlook.
Japan
The developments widely mooted in the past fortnight’s press were those outlined by the BoJ on Monday. To summarise:
BoJ expanding the existing fund supply from Y20trn to Y30trn and extending the maturity of liquidity operations from 3 to 6 months. The vote was 8-1, with one dissenter (Suda).
At the later press conference, reasons why Suda dissented were made elaborated on. Essentially she saw downside risks developing from further easing such as distorting market mechanisms and planting the “seed for a bubble”.
We’ve had more comments throughout the morning in line with the usual comments from Japanese officials (watching the Yen closely, co-ordination occurring between the BoJ and MoF).
Over to the government on the fiscal-side tomorrow (on Friday they said they would outline measures on Tuesday). The expectation here is that they will draw on $10.78bn reserve fund (put aside for emergencies such as earthquake). The suggestion over the weekend was that the Government would consider a supplementary budget bill to use a Y800bn surplus from the previous year.
“BOJ Takes Easing Action; Extends Duration of Low Interest-Rate Loans, WSJ, http://online.wsj.com/article/BT-CO-20100829-704828.html .
Europe, ECB
With the media refocusing itself towards the capital position of Irish banks in recent weeks, some good (if not unexpected) news on the extension of ECB liquidity provisions.
“Jean-Claude Trichet, president, is expected on Thursday to announce that at least until the start of 2011 banks’ demands for weekly, monthly and – probably – three-month liquidity will continue to be met in full”.
“ECB likely to extend emergency bank support”, FT, http://www.ft.com/cms/s/0/bf25c964-b385-11df-81aa-00144feabdc0.html .
Germany, how sustainable is the recovery?
Munchau once again sounding negative on European prospects – German growth predicated on exports which will decline if US and China slow. Nominal wages are not adjusting, leading to intra-EU imbalances. German growth will be “toxic, and quite possibly self-defeating in the long-run.”
“Germany’s rebound is no cause for cheer”, FT, http://www.ft.com/cms/s/0/2becafc4-b398-11df-81aa-00144feabdc0.html .
UK, growth revisions
British Chamber of Commerce upgrades its short-term growth forecasts (raising short-term economic growth forecasts; 2010 from 1.3% to 1.7%, 2011 from 2.0% to 2.2%. However, the body warned that the pace of UK economic growth will slow over the medium term as the effects of fiscal consolidation is more fully felt.
“UK Growth Set to Slow, Business Group Cautions”, WSJ, http://online.wsj.com/article/SB10001424052748703618504575459411833388140.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews .
UK, Danny Alexander, politics
Danny Alexander was gave an interview in the left-leaning Observer over the weekend. Biggest takeaway was the dashing of rumours about taxation coming down over the life of the parliament: “I think the tax burden is necessary as a significant contribution to getting the country’s finances in order. So it will have to stay at that level for some time”.
Interview’s background also has more descriptions of dissent from core Lib Dems over the extent of cuts. Developing theme,
“Treasury secretary Danny Alexander defends budget cuts as coalition comes under fire”, The Observer, http://www.guardian.co.uk/politics/2010/aug/29/danny-alexander-cuts-first-interview .
M&A, IPOs
A couple of signs of life in the Equity markets is the central theme in The Economists “Waiting for a wave” piece (The sub-header “A flurry of deals makes bankers salivate).
Quite a bit of momentum in the Tech sector – Intel have added to their $7.68bn purchase of McAfee by buying Infineon’s wireless chip in $1.4bn business.
“Intel to buy Infineon’s wireless chip business”, FT, http://www.ft.com/cms/s/2/51b83e10-b3bd-11df-81aa-00144feabdc0.html .
The article also sees signs of life from PE. On this theme the FT reports that Nokia and Siemens are considering private equity talks (deal worth up to $1bn).
“Nokia and Siemens consider private equity talks”, FT, http://www.ft.com/cms/s/0/d05740e8-b38d-11df-81aa-00144feabdc0.html .
“Sanofi Unveils Genzyme ‘Bear Hug’”, WSJ, http://online.wsj.com/article/SB10001424052748703618504575459603064628876.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews .
Really highlights a couple of points –companies have a lot of cash on their balance sheets (US corporates $2trn by some estimates) and that the micro situation of many companies is decidedly more positive than the overriding negativity on the macro outlook.
France, deficits
Continued negativity on France in the weekend press. The debate over pension reforms is set to commence with strikes from Trade Unions.
WSJ article revisits the problem of “optimistic” growth forecasts, especially in the context of reduced spending. A couple of weeks ago, France cut its 2011 growth forecast to 2% from 2.5%. The article is more negative on the likelihood of achieving this level, quoting a Natixis researcher who put the figure at 1%.
“Does the French Government Really Believe its Own Economic Forecasts”, WSJ, http://online.wsj.com/article/SB10001424052748703618504575459383837894628.html?mod=WSJEUROPE_hpp_MIDDLETopStories .
Eastern Europe, Core European Banks
Mixed article in The Economist about foreign-currency denominated debts in Eastern Europe (“A Glow from the East”). Couple of interesting assertions: “the chances that Latvia’s bad debts could overwhelm Sweden’s banks, say, or that souring loans in Hungary might cripple Austrian lenders seem rather low.” However, foreign currency denominated loans may weigh on credit availability and erode capital buffers, impinging local growth. Outright banning of FX-loans may crystalise losses: “In the short term such measures may further damp the supply of credit to economies that sorely need it.”
www.piagifx.com
