Friday, June 03, 2005
ECB fiddles whilst euro burns
Eurozone government bond yields remained at record lows on Thursday afternoon, and were little moved by the European Central Bank’s decision to leave interest rates unchanged at 2 per cent. With unemployment above 10% in Belgium, France, Germany, Spain and Greece- maybe these ECB members should join them after doing nothing for 2 whole years.
Investors were anxiously awaiting the press conference of Jean-Claude Trichet, ECB president, for new clues about the bank’s monetary policy. The interest rate futures market has started to contemplate the likelihood of a rate cut this year, although ECB has said its next move in rates would be upwards.
The 10-year German Bund yield slid to a record low of 3.211 per cent amid widespread uncertainty about the eurozone’s economic policy after both French and Dutch voters rejected the EU’s constitution in separate referendums. This is thougt to bode ill for economic growth, helping boost bond prices and leaving yields lower.
But UK gilt yields were slightly higher as investors braced from US labour market data on Friday. Ten-year gilts were yielding 0.6 basis points higher at 4.219 per cent - but still near their lowest levels since July 2003.
The ECB's decision was widely expected amid mounting economic and political turmoil in the wake of the French and Dutch rejection of the proposed European Union constitution and a deteriorating growth environment.
Indeed both the Organisation for Economic Co-operation and Development and Germany’s Ifo Institute last week called on the ECB to cut rates to stimulate economic growth. Interest rate futures currently factor in a 15 per cent chance of a rate cut later this year.
The OECD’s call came after the Paris-bound organisation revised down its forecasts for eurozone growth in 2005 and 2006 to 1.2 per cent and 2 per cent respectively, from 1.9 and 2.5 per cent. The OECD called for a 50-basis point rate cut to address a “chronic pattern of weak resilience”.
The Munich-based Ifo Institute spoke out after reporting that German business confidence had fallen to a near two-year low, mirroring a fall in the ZEW measure of investor sentiment.
Wolfgang Clement, Germany’s economics and labour minister, and a number of Italian ministers, also supported calls for the ECB to cut rates from their current historic low. But few analysts believed the Bank would bow to pressure to cut rates this month, with Jean-Claude Trichet, the president of the ECB, having warned that a cut would backfire, undermining growth by raising inflationary expectations.
Mr Trichet has instead given the impression he would like to see eurozone rates rise as soon as the economic conditions allow. However, the economic picture emerging from the eurozone remains bleak.
The French economy expanded by just 0.2 per cent in the first quarter, while Italy fell into recession. Although data showed the German economy expanding by a healthy 1 per cent in the first quarter of 2005, most commentators believed this was flattered by one-off factors.
Furthermore core eurozone inflation has fallen to just 1.4 per cent, its lowest level since February 2001, with oil prices now off their highs and second round effects from high energy prices remaining muted.
However the 5.5 per cent slide in the euro to $1.226 against the dollar since the ECB’s last meeting may have done some of the Bank’s work for it. The weakening of the euro is stimulative to growth in the same way a rate cut would be, and, if it persists, is likely to be an upward drag on eurozone inflation.
The ECB has also fears the growth in M3 money supply, which remains around 6.5 per cent, is inconsistent with non-inflationary growth, while rises in house prices in many countries are a result of monetary policy that is already loose enough, the bank has argued.
Investors were anxiously awaiting the press conference of Jean-Claude Trichet, ECB president, for new clues about the bank’s monetary policy. The interest rate futures market has started to contemplate the likelihood of a rate cut this year, although ECB has said its next move in rates would be upwards.
The 10-year German Bund yield slid to a record low of 3.211 per cent amid widespread uncertainty about the eurozone’s economic policy after both French and Dutch voters rejected the EU’s constitution in separate referendums. This is thougt to bode ill for economic growth, helping boost bond prices and leaving yields lower.
But UK gilt yields were slightly higher as investors braced from US labour market data on Friday. Ten-year gilts were yielding 0.6 basis points higher at 4.219 per cent - but still near their lowest levels since July 2003.
The ECB's decision was widely expected amid mounting economic and political turmoil in the wake of the French and Dutch rejection of the proposed European Union constitution and a deteriorating growth environment.
Indeed both the Organisation for Economic Co-operation and Development and Germany’s Ifo Institute last week called on the ECB to cut rates to stimulate economic growth. Interest rate futures currently factor in a 15 per cent chance of a rate cut later this year.
The OECD’s call came after the Paris-bound organisation revised down its forecasts for eurozone growth in 2005 and 2006 to 1.2 per cent and 2 per cent respectively, from 1.9 and 2.5 per cent. The OECD called for a 50-basis point rate cut to address a “chronic pattern of weak resilience”.
The Munich-based Ifo Institute spoke out after reporting that German business confidence had fallen to a near two-year low, mirroring a fall in the ZEW measure of investor sentiment.
Wolfgang Clement, Germany’s economics and labour minister, and a number of Italian ministers, also supported calls for the ECB to cut rates from their current historic low. But few analysts believed the Bank would bow to pressure to cut rates this month, with Jean-Claude Trichet, the president of the ECB, having warned that a cut would backfire, undermining growth by raising inflationary expectations.
Mr Trichet has instead given the impression he would like to see eurozone rates rise as soon as the economic conditions allow. However, the economic picture emerging from the eurozone remains bleak.
The French economy expanded by just 0.2 per cent in the first quarter, while Italy fell into recession. Although data showed the German economy expanding by a healthy 1 per cent in the first quarter of 2005, most commentators believed this was flattered by one-off factors.
Furthermore core eurozone inflation has fallen to just 1.4 per cent, its lowest level since February 2001, with oil prices now off their highs and second round effects from high energy prices remaining muted.
However the 5.5 per cent slide in the euro to $1.226 against the dollar since the ECB’s last meeting may have done some of the Bank’s work for it. The weakening of the euro is stimulative to growth in the same way a rate cut would be, and, if it persists, is likely to be an upward drag on eurozone inflation.
The ECB has also fears the growth in M3 money supply, which remains around 6.5 per cent, is inconsistent with non-inflationary growth, while rises in house prices in many countries are a result of monetary policy that is already loose enough, the bank has argued.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 9:59 AM 0 comments
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Thursday, June 02, 2005
Euro sinks further after ‘break up’ talk
The under- fire euro fell further on Wednesday, slumping to an eight-month low against the US dollar amid rumblings over the long-term future of the eurozone.
The fresh selling was prompted by a report claiming that Hans Eichel, the German finance minister, and Axel Weber, the president of the Bundesbank, were present at a meeting at which the possible break-up of European Monetary Union was discussed.
The German Bundestag is also said to have commissioned a report on the legal repercussions of a country wishing to leave the EMU.
Germany’s finance ministry labelled the talk “absurd”, while Mr Eichel and Mr Weber issued a statement saying the euro was a “unique success story”. But the damage had been done.
Although most analysts regard the break-up of the eurozone as an extremely faint prospect, they said the potentially disastrous repercussions of such an event mean it could not be totally ignored.
Tony Norfield, global head of forex strategy at ABN Amro, put the probability of a splintering of the eurozone at “5 per cent or less. Our view is that EMU will not break up. That will be way down the line as the last resort because of the political capital eveyone has got invested in it,” he said. Nevertheless Mr Norfield added that if a break-up was to occur, it would be a “disaster” for the euro.
Alan Ruskin, research director at 4Cast, suggested Asian central bank diversification from the dollar into the euro, a key factor in the rise of the shared currency in the past three years, could now be questioned.
“The average speculative player may not worry about the breakdown in the euro in the next five years, but for those central banks thinking in decades and readily raising their ratio of euro reserve assets, these are extremely relevant questions,” he said.
Steven Pearson, chief currency strategist at HBOS, raised the prospect of a buyers’ strike by Asian central banks. “They are probably questioning whether they have taken the proportion of eurozone assets too far,” he said.
The euro was also undermined yesterday by renewed expectations that the next move from the European Central Bank may be to cut, rather than raise rates.
This talk, although by no means a majority view, was fanned yesterday by news that euorozne manufacturing output contracted for a second month in April. First quarter eurozone growth was also revised down.
Jim O’Neill, global head of economics at Goldman Sachs, forecast a rate cut in the third quarter of 2005, and floated the possibility of the ECB opening the door to such a move by talking down its inflation forecasts at the press conference due to be held in the wake of today’s monthly rate decision.
Exit polls suggesting a 63 per cent no vote from the Dutch weakened the euro even further in US trading, where it slid to $1.216 from $1.223 in London, taking its slide against the dollar since mid-March to more than 9 per cent. The euro also hit a nine-month low of Y132.52 against the yen, and a four-week low of £0.6749 against sterling.
The euro’s woe spread further afield with rumours of a devaluation of the Moroccan dirham, possibly by up to 15 per cent, to counter strength against the euro.
Elsewhere sterling fell 0.3 per cent to $1.8111 against the dollar, just off a fresh seven-month low of $1.8094, and 0.4 per cent to Y196.28 against the yen after the Chartered Institute of Purchasing and Supply’s UK manufacturing survey fell to its lowest level since March 2003.
“This is a particularly depressing report, even by recent standards,” said Howard Archer at Global Insight.
The Australian dollar fell 0.7 per cent to a seven-month low of $0.7501 after first quarter economic growth came in at a disappointing 0.7 per cent.
The recent ructions in the currency markets have had their effect on trading volumes. The Chicago Mercantile Exchange reported a record 230,844 euro FX futures contracts traded on Tuesday, representing a notional value of $35.5bn
EBS, the interdealer platform, also reported a sharp surge in volumes on the same day. More than $200bn was traded on the system, up sharply from the daily $110bn average seen this year. A total 89,949 trades were conducted with euro-dollar the most active pair.
Last year, the Bank for International Settlements’ triennial study of the FX market reported record average daily volumes in the spot, forward and options markets of $1,900bn.
The fresh selling was prompted by a report claiming that Hans Eichel, the German finance minister, and Axel Weber, the president of the Bundesbank, were present at a meeting at which the possible break-up of European Monetary Union was discussed.
The German Bundestag is also said to have commissioned a report on the legal repercussions of a country wishing to leave the EMU.
Germany’s finance ministry labelled the talk “absurd”, while Mr Eichel and Mr Weber issued a statement saying the euro was a “unique success story”. But the damage had been done.
Although most analysts regard the break-up of the eurozone as an extremely faint prospect, they said the potentially disastrous repercussions of such an event mean it could not be totally ignored.
Tony Norfield, global head of forex strategy at ABN Amro, put the probability of a splintering of the eurozone at “5 per cent or less. Our view is that EMU will not break up. That will be way down the line as the last resort because of the political capital eveyone has got invested in it,” he said. Nevertheless Mr Norfield added that if a break-up was to occur, it would be a “disaster” for the euro.
Alan Ruskin, research director at 4Cast, suggested Asian central bank diversification from the dollar into the euro, a key factor in the rise of the shared currency in the past three years, could now be questioned.
“The average speculative player may not worry about the breakdown in the euro in the next five years, but for those central banks thinking in decades and readily raising their ratio of euro reserve assets, these are extremely relevant questions,” he said.
Steven Pearson, chief currency strategist at HBOS, raised the prospect of a buyers’ strike by Asian central banks. “They are probably questioning whether they have taken the proportion of eurozone assets too far,” he said.
The euro was also undermined yesterday by renewed expectations that the next move from the European Central Bank may be to cut, rather than raise rates.
This talk, although by no means a majority view, was fanned yesterday by news that euorozne manufacturing output contracted for a second month in April. First quarter eurozone growth was also revised down.
Jim O’Neill, global head of economics at Goldman Sachs, forecast a rate cut in the third quarter of 2005, and floated the possibility of the ECB opening the door to such a move by talking down its inflation forecasts at the press conference due to be held in the wake of today’s monthly rate decision.
Exit polls suggesting a 63 per cent no vote from the Dutch weakened the euro even further in US trading, where it slid to $1.216 from $1.223 in London, taking its slide against the dollar since mid-March to more than 9 per cent. The euro also hit a nine-month low of Y132.52 against the yen, and a four-week low of £0.6749 against sterling.
The euro’s woe spread further afield with rumours of a devaluation of the Moroccan dirham, possibly by up to 15 per cent, to counter strength against the euro.
Elsewhere sterling fell 0.3 per cent to $1.8111 against the dollar, just off a fresh seven-month low of $1.8094, and 0.4 per cent to Y196.28 against the yen after the Chartered Institute of Purchasing and Supply’s UK manufacturing survey fell to its lowest level since March 2003.
“This is a particularly depressing report, even by recent standards,” said Howard Archer at Global Insight.
The Australian dollar fell 0.7 per cent to a seven-month low of $0.7501 after first quarter economic growth came in at a disappointing 0.7 per cent.
The recent ructions in the currency markets have had their effect on trading volumes. The Chicago Mercantile Exchange reported a record 230,844 euro FX futures contracts traded on Tuesday, representing a notional value of $35.5bn
EBS, the interdealer platform, also reported a sharp surge in volumes on the same day. More than $200bn was traded on the system, up sharply from the daily $110bn average seen this year. A total 89,949 trades were conducted with euro-dollar the most active pair.
Last year, the Bank for International Settlements’ triennial study of the FX market reported record average daily volumes in the spot, forward and options markets of $1,900bn.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:53 AM 0 comments
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Wednesday, June 01, 2005
Treasury yields drop below 4%
Yields on the benchmark 10 year US Treasury notes fell below 4 per cent for the first time in three months after weak economic data and month- end buying pushed prices higher.
Yields on the 30- year long bond dropped to 4.331 per cent, their lowest in almost two years. The 10-year yield dipped to 3.992 per cent. Earlier, yields on 10-year German Bunds had fallen to new all-time lows at 3.260 per cent.
The moves coincided with comments by Stephen Roach, Morgan Stanley’s chief economist, who said he expected a China-led slowdown in Asia to encourage further bond buying.
“I now suspect bond yields will stay low for the foreseeable future and might even drift lower,” he said. “At some point over the next year, yields on 10-year government [bonds] could test 3.5 per cent in the US, 2.5 per cent in Europe and 1 per cent in Japan.”
Ten-year JGBs yesterday yielded 1.24 per cent, just off a 14-month low earlier last month at 1.21 per cent.
Mr Roach’s remarks followed a recent series of more bullish comments about the outlook for bonds. Bill Gross, head of Pimco, the world’s largest bond fund, recently forecast 10-year Treasury yields would remain between 3 per cent and 4.5 per cent over the next three-five years as a result of high demand.
Treasuries traders yesterday emphasised that the recent fall in yields was not necessarily a bet on the economy, but more the result of limited supply of longer-dated bonds.
“Maybe the true bubble in the world is in bond markets,” said one trader in New York. “What is dangerous is that everyone’s now looking for the bogeyman that bond yields are hinting at – thinking that yields are doing this for a fundamental reason – and that down the road we’ll find out what the bad stuff is.”
Usually, bond prices fall as yields track interest rate rises, but this time, longer-dated bond yields have fallen even as shorter-dated yields have risen.
Bond yields in the UK are actually inverted, meaning it costs more to borrow short-term than it does in the longer term. Australian and New Zealand bonds are showing the same pattern. Usually, an inverted yield curve implies the market is pricing in a recession in years to come. The spread, or difference, between yields on two- and 10-year Treasuries, has narrowed from 2.2 percentage points a year ago to 0.41 of a percentage point yesterday.
Yields on the 30- year long bond dropped to 4.331 per cent, their lowest in almost two years. The 10-year yield dipped to 3.992 per cent. Earlier, yields on 10-year German Bunds had fallen to new all-time lows at 3.260 per cent.
The moves coincided with comments by Stephen Roach, Morgan Stanley’s chief economist, who said he expected a China-led slowdown in Asia to encourage further bond buying.
“I now suspect bond yields will stay low for the foreseeable future and might even drift lower,” he said. “At some point over the next year, yields on 10-year government [bonds] could test 3.5 per cent in the US, 2.5 per cent in Europe and 1 per cent in Japan.”
Ten-year JGBs yesterday yielded 1.24 per cent, just off a 14-month low earlier last month at 1.21 per cent.
Mr Roach’s remarks followed a recent series of more bullish comments about the outlook for bonds. Bill Gross, head of Pimco, the world’s largest bond fund, recently forecast 10-year Treasury yields would remain between 3 per cent and 4.5 per cent over the next three-five years as a result of high demand.
Treasuries traders yesterday emphasised that the recent fall in yields was not necessarily a bet on the economy, but more the result of limited supply of longer-dated bonds.
“Maybe the true bubble in the world is in bond markets,” said one trader in New York. “What is dangerous is that everyone’s now looking for the bogeyman that bond yields are hinting at – thinking that yields are doing this for a fundamental reason – and that down the road we’ll find out what the bad stuff is.”
Usually, bond prices fall as yields track interest rate rises, but this time, longer-dated bond yields have fallen even as shorter-dated yields have risen.
Bond yields in the UK are actually inverted, meaning it costs more to borrow short-term than it does in the longer term. Australian and New Zealand bonds are showing the same pattern. Usually, an inverted yield curve implies the market is pricing in a recession in years to come. The spread, or difference, between yields on two- and 10-year Treasuries, has narrowed from 2.2 percentage points a year ago to 0.41 of a percentage point yesterday.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 4:45 PM 0 comments
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Monday, May 30, 2005
Euro falls after eu failure
The euro fell in early trading in Asia after the French referendum, amid worries about the effect on European Union economic policy of France's decision.
Luxembourg prime minister Jean-Claude Juncker, who chairs the 12-nation group of eurozone finance ministers, said after the result: “There is no reason to consider that the French ‘No' will produce a too huge impact on the European economy.”
But in early trading in New Zealand Monday morning, the euro fell to $1.2523, from $1.2574 in New York late on Friday. The euro has been under downward pressure in recent weeks, at least in part due to worries about the French poll. Sunday night's results suggested that financial markets had underestimated the scale of the No vote. In early trading in Tokyo, the euro fell fractionally to $1.2528 from $1.2585.
With markets in the UK and the US closed, traders were much more focused on Friday's US non-farm payroll numbers than digesting last night's news, he said.
The Nikkei stock average opened up, following a strong overnight session on Wall Street, rather than on any fallout from the French referendum.
Financial market worries about the French vote have centred on fears that a No vote would repre sent a backlash against structural economic reform in the EU.
The decisive No vote is embarrassing for Jean-Claude Trichet, president of the European Central Bank, who throughout the campaign always said he was assuming a “Yes” vote in France. The ECB holds its next rate-set ting meeting on Thursday.
Luxembourg prime minister Jean-Claude Juncker, who chairs the 12-nation group of eurozone finance ministers, said after the result: “There is no reason to consider that the French ‘No' will produce a too huge impact on the European economy.”
But in early trading in New Zealand Monday morning, the euro fell to $1.2523, from $1.2574 in New York late on Friday. The euro has been under downward pressure in recent weeks, at least in part due to worries about the French poll. Sunday night's results suggested that financial markets had underestimated the scale of the No vote. In early trading in Tokyo, the euro fell fractionally to $1.2528 from $1.2585.
With markets in the UK and the US closed, traders were much more focused on Friday's US non-farm payroll numbers than digesting last night's news, he said.
The Nikkei stock average opened up, following a strong overnight session on Wall Street, rather than on any fallout from the French referendum.
Financial market worries about the French vote have centred on fears that a No vote would repre sent a backlash against structural economic reform in the EU.
The decisive No vote is embarrassing for Jean-Claude Trichet, president of the European Central Bank, who throughout the campaign always said he was assuming a “Yes” vote in France. The ECB holds its next rate-set ting meeting on Thursday.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:41 AM 0 comments
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