The risk aversion theme continues on the markets with the pound and US dollar continuing to make gains as the euro continues to take a battering and the likely slowdown in China and tension in the Korean peninsula adding to the safe haven status of the US dollar.
If the intention of the European Union ministers meeting at the weekend in agreeing a €85 billion rescue package for Ireland was to send a signal to the market that European ministers were up to the challenges presented by the unfolding crisis in Europe, then yesterday’s reaction seemed to suggest that they failed miserably.
There remains the major concern that given the precarious state the Irish government finds itself in politically, that the fiscal budget will not get passed on 7th December on the basis that at least €17.5bn of the bailout fund is coming from Irish pension funds and cash reserves. All three major Irish opposition parties have vowed to vote against the austerity budget of 7 December on this basis.
There is also a sense that the money being provided may not be enough and even if it is there is the possibility it may never get paid back given the high rate of interest (5.7%) being charged on some of it.
A lacklustre Italian bond auction yesterday added to the prevailing sense of uncertainty in bond markets as borrowing costs for Portugal and Spanish bonds increased to record levels. There were also the first signs that a contagion back draft has started to spill over to Belgian and Italian bonds with 10 year Italian yields pushing above 4.5% for the first time.
The pound also benefited after the Office for Budget Responsibility upped its growth forecast for 2010 by 0.6% to 1.8%, though it trimmed its forecasts for 2011 and 2012 by 0.2%.
The US dollar has continued to push higher against its currency peers on the back of the debt concerns in Europe as well as fears that China may act to further tighten fiscal policy in the coming weeks.
Other factors buoying the dollar include positive retail sales figures from Black Friday, as well as encouraging sales figures from Cyber Monday which suggested that the US economy could get a pre Christmas e-commerce sales boost.
There is clear evidence that the pound will come under more selling pressure from January with the 2.5% increase in VAT and the implementation of the public sector spending cuts outlined in October’s spending review. Clients with currency requirements that require selling the pound may wish to take advantage of the current rates available.
