The pound touched a 6 week high as Europe’s debt crisis sent the euro lower on Monday after Friday’s European bank stress test results did little to reassure investors. The European Banking Authority’s (EBA) tests showed just eight banks failed but many have criticised the test for not being strict enough.
In addition, the fear of a US government debt default alongside ongoing fears about Europe sent the safe-haven Swiss franc to a new all time high against both the dollar and the euro.
A summit of euro zone leaders, scheduled for 21 July is keenly awaited by the markets who remain concerned that Italy and Spain could follow in Greece and Ireland’s footsteps. The omens don’t appear overly positive for a successful outcome as euro zone governments and the ECB continue to disagree about how the burden of how Greece’s new rescue plan will be shared out.
The pound was also helped by a quiet news day ahead of retail sales data and Public sector borrowing requirement data and the minutes of this month’s Bank of England rate setting meeting due out later this week.
Overshadowed by the events in the euro zone, a report out yesterday from the ITEM Club, the economic forecasting group sponsored by consulting firm Ernst & Young’s suggested that U.K. economic growth will fall for the second time this year as weak consumer spending and Europe’s sovereign debt crisis cloud the outlook for the recovery. UK gross domestic product will increase 1.4% in 2011, compared with an April projection of 1.8%. It also forecasts economic activity in 2012 expanding at a rate of 2.2% in 2012 instead of 2.3%.
The Federation of Small Businesses’ (FSB) Voice of Small Business Index fell by 6.4 points to +0.3, from +6.7 in the first quarter. If the index registers zero it means there has been no change in confidence from the previous quarter. The higher the score is above zero, the greater the confidence of small businesses. The FSB called on the government to cut VAT to just 5% in the construction and tourism sectors.
Ratings agency Fitch warned that it could lower the U.S credit rating if an agreement over the debt ceiling is not reached. Although it does not expect changes ahead of the August 2 deadline, the credit rating agency could either place the current AAA rating under negative watch or cut the rating if an agreement is not reached.
The first major test coming up is on August 4 when a $90 billion package of Treasury notes are due. If it is not paid in full, Fitch will go on to reduce the rating from AAA to B+, the best possible rating for Treasury notes in possible default with the prospect of a partial or total recovery. If the default persists or additional payments are not realised, then we would witness a new rating cut.
This would be a serious backward step for the world economy leading some analysts to predict a post Lehman Brothers fourth quarter of 2008 scenario for this year end.
Commentary by Tony Redondo
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