Euro turmoil could cause havoc on U.S. exports

11 Nov

Experts fear Europe’s debt crisis could take a bite out of U.S. exports, despite a record 180.4billion dollars sold by companies in foreign sales seen in September.

The Commerce Department credited rises in industrial supplies and consumer goods, such as clothes and toys, in the month retailers start preparing for the holiday season.

However, economists think the current level of exports is unsustainable amidst the turbulent times in Europe.

Paul Dales, an economist with Capital Economics, said: “I just can’t really see exports continuing to perform as well as they have done. It’s pretty clear that things aren’t going well from a trade point of view, and that the slowdown in the euro zone is starting to have an effect in the U.S.”

President Obama put emphasis on U.S. companies exporting to Asia as a solution. However, it is feared the debt problems in Europe could have a “knock on effect” in emerging markets such as China, Europe’s largest trading partner.

Menzie Chinn, economics professor at the University of Wisconsin, said: “If you have a big financial conflagration, that has repercussions that are extremely hard to predict.”

China is very important to American companies; the U.S. Exports 100 billion dollars worth of goods and services to China each year, making it their third largest export market.

Sales with the Chinese market result in jobs being created in American. Jobless claims reached a seven month low in the third quarter, which showed signs of the U.S economy on the road to recovery. If China are heavily affected by Europe’s debt crisis, the gradual economic recovery in the U.S. could be hurt.

Advertisements

Berlusconi set to leave… Italian debt set to stay

10 Nov

Another day, another record of high cost borrowing. Yields on Italian bonds were 7per cent, a level seen as unsustainable.

Only this time a possible bailout for Italy poses as a much larger threat than those for Portugal, Ireland and Greece. With Italy’s size, it has been deemed “Too big to bail” according to many investors. Fredrick Newman from HSBC in Hong Kong said, “Europe has moved from a manageable crisis in Greece to a much bigger challenge in Italy.”

Italy has a slow growth rate, which means it would be virtually impossible to pay back what it owes over ten years with an interest of 7per cent. This could raise the prospect of an uncontrolled default by the country, meaning global financial markets would be undoubtedly hit hard.

What’s more, the fear of contagion has been causing unease in the market. Rebecca Patterson, chief market strategist at J.P. Morgan Asset Management, said: “Contagion is alive and well.” She said Italy could pose as a “systemetic risk” to global economy, accounting for 20 per cent of the GDP of the eurozone.

James Mackintosh, investment editor for the Financial Times, said Italy “could live with higher borrowing costs for at least a year, although it wouldn’t be terribly comfortable for Rome… The real problem is investor psychology.”

Even if investors wanted to buy Italian bonds, they would see how others found it unattractive, meaning they are likely to steer clear.

Amidst the panic, the confusion over early elections in Italy have been making the headlines. Traders responded well to Mr Berlusconi’s planned departure, which saw a positive effect on financial markets. But a disagreement between Mr Berlusconi and Italian President, Giorgio Napolitano has sparked fears over whether the country will hold early elections next year.

Under Mr Berlusconi’s rule, the country has seen unemployment rates amongst young people reach a shocking 30per cent. It is hardly surprising the country craves new leadership in such turbulent times.

Mr Napolitano aimed to dispel the rumors last night, insisting that Mr Berlusconi will leave “within days.”

Mr Mackintosh said, “It’s true that Italy needs to dump Mr Berlusconi and reform its economy. It needs to do both pretty urgently. It will need to be financed in the mean time.”

All signs lead to the ECB. John Stopford, head of fixed income at Investec suggested if the ECB did not step in it could mean a break-up of the euro.

But with a potential rescue cost of as much as 1,000billion euro, the euro debt crisis fund could reach breaking point. Italy needs to issue 340billion euro in new debt in 2012, but the eurozone bailout fund only has about 300billion euro left over after the bailouts of Greece, Ireland and Portugal.

Euro rescue fund raises 3billion euro

9 Nov

The European Financial Stability Facility have raised 3billion euros in a bond sale on Monday, despite fears from many investors who have showed hostility towards eurozone bonds.

The sale was expected to go ahead last week, but it had to be postponed due to turmoil in the markets, and the EFSF expected to hold the sale in the ‘near future’. This week finance ministers were seen speeding up the process. However, The Financial Times suggest the volatile markets are drawing bankers away.

Yet EFSF head Klaus Regling was eager to assert: “I am pleased that the EFSF has attracted investors from all over the world with a satisfactory overall amount despite a difficult market environment”.

The EFSF named the three banks who will be joint managers for the 10-year deal; Barclays Capital, Credit Agricole and JP Morgan.

The Financial Times reports how one banker sees the EFSF bond sale favorably, “The EFSF wanted to show that it can price in any market and for that reason I would say this is a successful deal”.

The ten-year bond has been priced at 177 basis points – over triple the interest of the deal issued in June, and standing as the highest rate so far. Yet some bankers have said the two cannot be compared, as the situation has changed making it difficult for borrowers, including the EFSF.

Possible nuclear weapons developed in Iran

9 Nov

The battle is between Iran’s capital Tehran and the west. The war tactics may include nuclear weapons and a surprise attack from Israel. And the prize remains the same. Oil at an affordable price.
Whilst the increase in price by the barrel has caused unrest amongst traders, it is the possibility of the development of nuclear weapons in Iran that has sparked headlines today.

The UN’s International Atomic Energy Agency have been gaining evidence over the past eight years to suggest Iran have carried out “work on the development of an indigenous design of a nuclear weapon including the testing of components”.

This has led Ehud Barak, Israeli’s defense minister, to warn in a local radio interview, “we are probably at the last opportunity for co-ordinated, international, lethal sanctions that force Iran to stop.”

But Tehran are unlikely to cower in the trenches. As the world’s third-largest oil exporter, Iran can afford to increase oil by the barrel. What’s more, the BBC have reported Iran’s envoy to the IAEA Asghar Soltanieh actively condemned the claims of the development of a nuclear weapon, describing the report as “unbalanced, unprofessional and prepared with political motivation and under political pressure by mostly the United States”.

Yet it is clear from some market participants reactions in a survey they are predicting a significant price rise by the barrel. The survey, ran by The Rapidan Group in Washington, showed some stating there could be an increase of 175 dollars, to a high total of 290 dollars a barrel. Currently, the Financial Times reported the price has rallied to almost 115 dollars.

Even more worrying, Iran could retaliate by closing the oil flow through the Strait of Hormuz.

Meanwhile, there is a supply uncertainty elsewhere in Libya, Yemen and Syria. This doesn’t help the west’s situation, as it means Tehran can up the prices as the oil is in such high demand.

A report from the US department of energy said, “Oil prices continue to face upward price pressure because of supply uncertainty resulting from ongoing unrest in the oil-producing regions of the Middle East and north Africa”.

Italian PM refuses to back down, despite possible no-confidence vote

7 Nov

The future of Italian Prime Minister Silvio Berlusconi’s government looks increasingly shaky, as thousands of angry protestors took to the streets of Rome, demanding his resignation. They want a new leader who will lead them out of economic crisis, in order to lower the debt of the euro-zones third largest economy.

This is amidst market fears that Italy may be next in line to need a bailout from its European partners. If this were to happen, it would be more serious than the crisis in Greece due to its size.

With the combination of a parliamentary majority constantly in doubt, as well as rising international criticism, the Wall Street Journal state Mr. Berlusconi no longer has the ability to make serious policy moves.

Furthermore, Berlusconi may also face a no-confidence vote, which he could lose if potential defectors stick to their guns. A scheduled ballot on Tuesday will reveal the votes of once faithful members who have threatened to vote against the government.

Despite this, he refuses to stand down. He said in a statement on Saturday, “I am sorry to disappoint, but responsibility in the face of voters and the country requires… our government to continue this battle”.

Sovereign-debt consultant Nicholas Spiro said, “Mr Berlusconi may still be in office, but he has not been in power for some time”.

When a government loses its parliamentary majority in Italy, the solution is either the formation of a shuffled administration, the formation of an interim so-called technical government charged with finishing urgent business, or new elections.

If early elections are called, it is unclear who will step up to challenge the premier. The left-wing opposition is in disarray, and a group of centrist forces also opposed to Mr. Berlusconi have a number of leaders who draw from disparate constituencies, ranging from pro-Vatican forces to secularist ones.

If a technical government is forged, many lawmakers have said former EU competition commissioner Mario Monti could be tapped to take the helm.

There have been several meetings between Democratic Party leader Pier Luigi Bersani and President Giorgio Napolitano, Italy’s head of state, to discuss the state of Italy’s economy. Mr Napolitano has the power to dissolve Parliament if Mr. Berlusconi no longer has a strong enough majority to govern.

Worrying times, as the Wall Street Journal said it is possible his parliamentary majority could fall apart as early as next week.

So what would Mr. Berlusconi have to do to turn things around and get the people back on his side? European leaders at the G-20 summit in Cannes asserted he must stick to commitments, including the loosening of Italy’s strict labor code, lightening the state’s pension load, and privatizing state assets. The Wall Street Journal reports how according to people familiar with the matter, officials from the International Monetary Fund are expected to arrive in Rome as early as Monday to ensure Italy is sticking to its pledge. Yet the European leaders have not been convinced by Mr. Berlusconi’s promises of an overhaul.

The Italian PM has faced many scrapes during his 18 years in politics, but will this be the final nail in the coffin? The Wall Street Journal said he may well survive what is shaping up to be the most dangerous upheaval in his ranks since his latest term began in 2008.

Dollar relying on Euro to stay afloat

4 Nov

With all the drama in the Eurozone as of late, it is the US Dollar taking centre stage today as it appears more vulnerable than the euro.

Whilst the US economy is better than it’s low in August, with help from the Japanese intervention to weaken the Yen, it’s performance is still not to standard – the dollar has fallen almost 3 percent against the Euro this year. The Financial Times state the US economy, considered to be a relative haven, hasn’t managed to bounce from the Eurozones debt crisis, which shows its reliance on the central bank to balance a dual commitment. Combined, their aim is to maintain stable prices and maximum employment.

Alan Ruskin, strategist at Deutsche Bank said, “The primary negative of the dollar is that it has a central bank willing to pursue unorthodox policy and, while that won’t stop dollar appreciation, it does explain why the euro has not sold off more”.

The Feds Chairman, Ben Bernanke, has been considering options should the economy require further help. Purchasing of mortgage backed securities has been suggestion as one possibility.

Meanwhile, Mario Draghi, the new ECB president, warned of a “mild recession” in Europe. This will not help the US economy recover. Whilst some analysts argue the euro is set to weaken, others believe it will not hit the low of $1.19 when Greece’s debt problems erupted.

Instead, analysts predict it will fall to $1.30 over the next few months, returning to January’s low, but not the critical levels of 2010.

Head of global rates and currencies research at Bank of American, David Woo, says the bank is maintaining a 2012 year end target of $1.40.

Mr Ruskin explains how for a single currency to breakdown, “You need to see a rupture of the eurozone core that results in capital flows leaving the euro”. The Financial Times states that although this is not impossible, it is not yet regarded as the most probable outcome.

Uneven Split in Fed Votes

3 Nov

The US Federal Reserve have voted… and the split in votes were far from even, although the general outcome of keeping interest rates on hold , and maintaining its bond-buying programmes were expected. This move will encourage more borrowing and investment. Chairman Ben Bernanke said the Fed was also considering changes to its communication strategy.

The committee voted 9-1 in favour of the statement, with the one dissenter being Charles Evans, an improvement from the 7-3 vote recorded in September. Mr Evans wanted the fed to take further action to boost the economy, although others fear that his methods would run the risk of higher inflation.

Eric Stein told the Financial Times Mr Evans position as sole dissenter, “could be a signal that his policy views were gaining ground”.

So what would Mr Evans do? He thinks the fed should keep interest rates low until unemployment falls below 3 percent, as long as inflation remains below 3 percent.

Mr Bernanke said unemployment was too high, and the economy was “dissatisfying”. Economists polled by Bloomberg predicted Friday’s figures would show the US Economy added 95,000 jobs in October. Also, a report from a placement company showed that job cuts have been the lowest levels since June, but lay-off announcements are still 12.6per cent higher than a year ago.

However, it’s not Mr Evans vote that has been causing discussion amongst analysts. They’re more concerned by the politics of the votes, regarding the three hawks who voted in favour.

Paul Ashworth said, “the view of the hawks is that, once the decision has been made by the majority, it just causes confusion if they continue to roll back action that has already been taken”.

Two banks… A lot of cuts

2 Nov

Current job loss figures suggest the Swiss Bank Credit Suisse has faced the full brunt of the European sovereign debt crisis, with the company cutting 1500 jobs, on top of the 2000 cuts announced in July.

And Credit Suisse aren’t the only ones making job cuts… Japanese Normura will be slashing costs by 1.2billion dollars, after seeing losses of 46.1billion yen from a disappointing second quarter.

Both banks performed below expectations, both have been hit hard by anaemic economic recovery in Europe and the US.

So what’s next for Credit Suisse and Normura? Credit Suisse’s chief executive Brady Dougan is busy promoting the banks business model as a more regulated, less profitable climate for investment banking. Mr Dougan plans to reduce risk weighted assets in the fixed income business by 113billion by the end of 2014. To reach this goal, Credit Suisse aim to leave unsecured trades, and decrease its secuitisation businesses, whilst tightening its richest clients, the ultra high net worth individuals. Furthermore, the bank hopes to focus on emerging markets.

Shareholders are remaining cautious. The banks shares fell by more than 8 per cent on Tuesday, resulting in the shares being down 36 per cent for the year.

Meanwhile, Takumi Shibata, chief operating office of Nomura, said the bank “aims to get through these cloudy times with a lower expense base”. At an analysts meeting Mr Shibata asserted that the company would not be shutting down divisions or regions, predicting its healthy balance sheet will allow it to redeploy its resources to build up its franchise again.

As with Mr Dougan’s claims, Mr Shibata has not been convincing analysts, who criticized his optimistic claims. Jun Shiota, analyst at Daiwa Capital Markets in Tokyo said, “Normally things do not work that conveniently. If the market improves they will rebound, but it is unlikely that they can rebound more than their western competitors”.

Italian bond yields rise to worrying levels

1 Nov

Italy falls into unstable territory as its bond yields have risen above six percent for its ten year debt. This is worrying, as the market claims anything above 6.5percent are unsustainable. Michael Krautzberger, head of euro fixed income at Blackrock said, “the fact they have risen since last weeks announcement is not a good sign”.

Market players claim the country is “too big to bail” so let’s consider some of their options.

One option would be for Italy to sell enough bonds at auction which is expected to be in the middle of the month. Some bankers think this is a good solution as it is so soon after the eurozone rescue plan where a new initiative was put into place protecting the first 20 percent of losses when bonds are being sold at auction. The EFSF bonds have an explicit guarantee so ought to be seen by investors as safer. Current prices suggest the reverse.Whilst some are optimistic, others fear Italy’s unstable condition will be unattractive to investors, who may steer clear of Italian bonds at auction.

Another option is for the European Central Bank to buy Italian bonds. The ECB stepped in back in August, purchasing an estimated 70billion euros worth of Italian bonds. Whilst this lowered the percent level, many investors believe the only option Italy has is for the ECB to up their government bond buying programme.

Jacques Cailloux, head of European economics at RBS, said, “All roads lead to the ECB as far as Italy is concerned. The only way to stabilize yields or send them lower is for the ECB to buy Italian debt in size”.

People are now looking to Mario Draghi, the new ECB president, who will decide Italy’s fate concerning the bond market at the central bank press conference on Thursday. He has a tricky decision to make, on the one hand he may have to throw an estimated 700bn euros at the Italian bond market. If Mr Draghi decides against this, it may lead to the percent level rising higher, resulting in the collapse of the euro.

Japan Intervenes on Yen for “as long as necissary”

31 Oct

The Japanese government has intervened in the currency market to weaken the yen, after the dollar falls to a post-war low of ¥75.31.
Tokyo’s move sent the dollar spiking as much as 4 percent above 79 yen after the intervention.

Dealers have estimated the cap amounts to an estimated ¥5 trillion to ¥6 trillion, the equivalent of around 63 billion to 76 billion euro.

Prime Minister Yoshihiko told parliament the cap was placed on the world’s no. 3 economy, “in order to keep downside risks to the Japanese economists from materializing”.

According to Mr Azumi, the intervention will continue as long as necessary, hinting at a more long term solution than the limited duration government officials suggested in private.

“While I can’t say on what the market may think, we plan to continue intervening until we are satisfied.”

Mr Azumi admitted speculation in the Forex market has pushed the yen to unrealistic levels. The currency has maintained a ‘safe-haven’ position, which has contributed to the rise. The ongoing debt crisis in Europe combined with the slowdown in the US make the safe-haven Yen attractive to traders. Some analysts believe the intervention has been put forward to decrease the level of speculation, rather than changing the strength of the yen.

A strong yen is disruptive to Japan’s export-led economy as it makes goods more expensive to foreign buyers. Whilst the currency is attractive, profitability of goods exported have seen a downward turn following the tsunami and earthquakes in March that led to a $250billion dollar rebuilding effort. This has rocked the supply chain, leading companies such as Toyota Motor Corp. and Sony Corp. in search of more prosperous positions overseas.

It’s not the first time this year Japanese authorities have had to step in to change currency markets… Japan joined G7 nations in March in an attempt to stem the yens rise, later followed by a move in August when Japanese sold the yen in markets.

Despite these previous efforts, the yen has continued to rise resulting in today’s cap. Market players have expressed doubts as to whether it will have much impact, many pointing towards the failure of the previous intervention in September last year.

Leading Japanese Economist for Societe Generale Takuji Okubo believes the government will be required to intervene again: “We do expect the yen to continue to strengthen but then the Japanese government has a good reason to protect a certain level of the yen or at least stop the acceleration of yen strength. So we do expect the yen to appreciate again and the Japanese government to step in again.”