Weekly Market Commentary – Week Ending 25/11/11
It seems each week the troubles facing the eurozone just keep mounting up and the disastrous consequences of a complete break-up of the euro become a distinct possibility. This week alone has seen Germany’s Chancellor Angela Merkel insist that the European Central Bank would not act as the “lender of last resort”, even though Portugal has had national strikes and had its sovereign debt rating downgraded to junk status by Fitch, Italian bond spreads have reached record highs again and reports that Dexia Bank may require further emergency funds to prevent it from going under. What will it take until Merkel gets it that the euro is teetering on the brink of collapse whilst she stands by and watches it sink.
As a result of all the past week’s events equity markets have plunged as investors sought the sanctuary of safe haven assets such as the dollar, which today hit fresh seven week highs against the euro following Italy’s disastrous bond auction this morning where yields hit 6.5% to borrow over six months, double what it paid last month and much higher than analyst’s expectations. The real concern now for Italy is that in the last week of January it must refinance more than €30 billion of bonds and if the market refuses to take up the auction and the ECB has not changed its stance, then Italy could be forced to default and it may well spell the end for the euro. The only hope is that the ECB and Merkel will be pressured by other eurozone countries to change its stance and an article printed in the Financial Times today may well suggest that could now be a possibility. The article states that the Dutch, who have since now taken the same stance as Germany, seemed to have relented and endorsed the ECB as being the lender of last resort. The news has come as welcome relief to the euro and eurozone, but it is Germany’s word that will be final and as yet they have not indicated they are about to change their minds any time soon.
As mentioned earlier the dollar has been the biggest winner on the currency markets this week as fears about the eurozone and general economic health of the global economy pushed investors to seek the shelter of safe haven assets such as the U.S. dollar. The euro on the other had has been sold off this week and as Manuel Oliveri, currency strategist at UBS in Zurich put it, “Merkel sees no scope for euro bonds and the ECB continues to make it clear it sees no scope for financing public debt. Without agreement on either of those two factors there is not much chance of an improvement in sentiment toward the euro and we think it can go lower from here still.”
The Canadian dollar also lost out this week and again today, hitting a seven week low against the U.S. dollar as investors shied away from commodity driven currencies. Today’s decline came after the Italian bond auction stoked fears that the ever increasing debt crisis could lead to a break-up of the currency bloc. The loonie was also not helped by the thin trading volume due to the Thanksgiving holiday in the States yesterday, where currency movements can be exaggerated due to illiquid markets.
The markets will be back in full swing on Monday when once again all eyes will firmly be focused on the eurozone and more importantly what Angela Merkel and Germany are going to do to put an end to the crisis. The concern is that if she sticks to her guns over the coming weeks and insists that the ECB and Germany will not sanction a bailout of Europe’s sovereign debt, then the euro will most certainly break-up and Mrs. Merkel will go down in history as being the reason for its catastrophic failure.
