Weekly Market Commentary – Week Ending 18/11/11
The escalating crisis in the eurozone took another turn for the worse this week when Italian, Spanish and French borrowing costs soared to near record highs and plunged the eurozone to the brink of collapse once again. It prompted the new European Central Bank President, Mario Draghi to admit his disbelief at the level of action taken by eurozone governments to deal with the crisis. He commented, “Where is the implementation of the long-standing decisions? We should not be waiting any longer.” Many analysts now believe that the only way to prevent contagion spreading across the eurozone region is for the ECB to “Print Money” and buy up vast quantities of Italian, Greek, Spanish and French bonds in the same way the Bank of England and the Federal Reserve pumped vast amounts of money into their respective economies in their own forms of quantitative easing measures.
However, trying to find consensus within the eurozone is like trying to find a needle in a haystack.Germany does not feel that the ECB should buy up these bonds and instead feels eurozone member states should stick to the agreement formulated when they met in Cannes earlier in the month to strengthen the European Financial Stability Fund by the December deadline. The worry is that if borrowing costs continue to rise the ECB may have no option but to act, otherwise the “unthinkable” may actually become “thinkable”. Some brighter news did surface yesterday and today in the eurozone after Mario Monti, Italy’s new Prime Minister not only survived a vote of no confidence but also announced new measures helped at tackling Italy’s rising debt mountain. As a result of this news and speculation out today that the ECB may start lending funds to the IMF, the euro reversed some of its losses from earlier in the week and was some 1 percent up against the greenback alone today.
Sterling continued to lose ground earlier in the week dropping to October lows against the dollar, but better than expected retail sales data out yesterday halted sterling’s slide and gave the pound some welcome support. Retail sales rose at an unexpected 0.6% in the month of October against a forecast of a drop of -0.3%. However, further gains were limited after reports suggested that the Bank of England may feel the need to increase its own asset purchase program beyond the £275bln target in order to keep its 2% inflation target on track. The dovish tone set by the Bank of England is likely to weigh heavily on sterling and many analysts predict a bearish outlook for the pound over the coming months.
In the U.S markets the dollar lost ground against most of the majors overnight and in the European trading session today after speculation the ECB may act to support the eurozone and Italian Prime Minister, Mario Monti winning a vote of no confidence, helped accelerate gains before the opening bell in New York. As in the eurozone, the U.S.has its own debt problems, which was reiterated by New York Fed President William Dudley who stated that the Federal Reserve would do “everything” in its powers to put life back into the U.S.economy as it still faces “significant downside risks”. As such, many feel that the door has been left open for the FOMC to increase its own quantitative easing measures and all eyes will turn to next week’s deadline for the U.S.“Super-Committee” to propose substantial budget cuts to help try and reduce its own debt mountain.
Finally, in Canada data out this morning showed annual inflation eased slightly in October, after posting a near record high in September. The consumer price index rose 2.9% in October, dropping from September’s 3.2% prompting traders to pull back expectations on the Canadian central bank cutting interest rates over worries about European and U.S. growth. The loonie strengthened to session highs this morning in the U.S. and as Camilla Sutton, Chief currency strategist at Scotia Capital put it, “The gains were fairly broad based. That limits the ability for the Bank of Canada to turn too dovish with still rising inflation in Canada, and it’s positive for the Canadian dollar.”
