For the first time in 11 working days, there was a measure of optimism and therefore risk appetite in the market allowing the euro to retrace against the pound and the US dollar as the dollar felt a weakening in demand for its safe haven qualities. Likewise, the high yielding, commodity based currencies like the Australian and New Zealand dollars also made substantial gains.
The euro was backed yesterday by optimism that euro zone leaders may be putting together a new, comprehensive pact to resolve the region’s sovereign debt crisis. Markets reacted positively to the news that officials have agreed on steps to bolster a key rescue fund and that Germany and France are also discussing a fiscal union ahead of a summit due on 9 December.
The optimism flooded the markets despite ratings agency Moody’s warning that the euro zone crisis puts the credit rating of all the bloc’s members in danger. The euro is likely to stay in focus this week as France, Belgium, Italy and Spain all hold bond auctions this week.
Yesterday, Italy has issued €567 million in 12-year Treasury bonds, indexed to euro zone inflation, at a yield of 7.3% compared to 2.19% at an auction for similar instruments last year. In the last two years, borrowing costs of 7% and over triggered bail outs for Greece, Ireland and Portugal.
Credit ratings agency Standard and Poor’s advised over night that it may be considering putting France’s AAA rating under review for a possible downgrade. One of the daily’s diplomatic sources stated that the move “could come in a week to 10 days”. Meanwhile, the French Finance Minister, François Baroin, has stuck with his growth forecasts despite a series of economic indicators having raised fears of a downturn. The minister repeated the estimate for economic growth of 1% next year and indicated that there are no plans to implement a third round of austerity measures.
Today, UK Chancellor George Osborne will outline plans to stimulate the UK’s sluggish economy. Growth forecasts are expected to be gloomy with the British Chambers of Commerce (BCC) cutting its growth forecast for the UK from now until 2013 due to the continuing uncertainty surrounding the euro zone debt crisis.
They have also reduced their estimate for this year’s UK GDP estimate to just 0.9% from their prior forecast of 1.1% and warn that they now expect “very weak” growth for 2012, with next year´s forecast dropping to 0.8% from the previous estimate of 2.1%. For 2013, they cut their forecast to 1.8% from 2.5%.
Faced with this weak economic outlook, they estimate that the Bank of England will keep interest rates at their current historic low level of just 0.5% until at least the fourth quarter of 2012 and increase the size of its Quantitative Easing (QE) programme to £325 billion from the current £275 billion level.
Over the Atlantic, credit ratings agency Fitch has cut its outlook on the United States’ credit rating to negative from stable, although the agency has opted to keep the nation’s AAA credit rating intact for now.
In Fitch´s opinion there is “considerable uncertainty surrounding the economy’s potential output and scope for a period of above trend economic growth. The longer productive capacity remains idle and unemployment high, the greater the likelihood that the loss of output (and tax receipts) is greater than currently estimated, with negative implications for the medium to long-term fiscal outlook”.
The agency also explains that the downwards revision to its outlook reflects “declining confidence that timely fiscal measures necessary to place US public finances on a sustainable path and secure the US’s ‘AAA’ sovereign rating will be forthcoming following failure of the Congressional Joint Select Committee on Deficit Reduction to agree at least $1.2 trillion of measures to cut the federal budget deficit over the next 10 years as mandated under the Budget Control Act passed in August”.
