The pound reached a 9 month high against the euro and strengthened against the majority of the 16 most actively traded currencies as nerves replaced optimism following the conclusion of last week’s European summit.
The markets remain concerned that euro leaders did not do enough to stem the region’s debt crisis. While European leaders announced a raft of measures to discipline and strengthen fiscal ties in Europe, markets were generally left unimpressed. Monday was marked by concern that the measures would not be enough to stem contagion and the region dipping into recession. This led to a big rise in risk aversion with big falls registered in worldwide stock and commodity markets and the selloff in risk was also felt by the high yielding risk currencies like the Australian dollar and South African Rand which took a battering. Conversely, demand for the safe haven appeal of the US dollar caused it to also rise sharply across the board.
The credit ratings agencies were busy yesterday. Moody’s reiterated its intention to reassess its ratings on European sovereign debt in early 2012. Moody’s cited concern that the summit offered “few new measures.” Moody’s noted in its latest Weekly Credit Outlook that the lack of stabilisation in credit market conditions will still require it to review its ratings for the euro zone countries in the first quarter of next year.
The credit rating agency insists that the “pressure remains on euro area sovereigns in the absence of decisive initiatives” and warns that its analysis of the “rising threat to the cohesion of the euro area and the further shocks to which it and the wider EU remain prone” has not changed.
The Moody’s analysts restate that their “central scenario” continues to be for the preservation of the euro zone without further widespread defaults, but point out that further shocks “would likely lead to selective rating changes”. In this context, they repeat their intention to “revisit the level and dispersion of ratings during the first quarter of 2012”.
Meanwhile, Fitch Ratings also predicted a “significant” economic downturn in Europe in the short term and said the summit did “little to ease pressure” on the region’s debt crisis. Fitch also predicts global growth will be 2.4% in 2012, down from 2.7% and 3% in 2013, down from 3.1% previously while Standard&Poor’s chief economist for Europe, Jean-Michel Six described last week’s agreement by the European Union as “significant,” according to Reuters. He added however that, “let’s not raise expectations too high, there will be more summits (…) time is running out and action is needed on both sides of the equation, on the fiscal and monetary side.”
Of particular interest, the economist also holds that, “there is probably yet another shock required before everyone in Europe reads from the same page, for instance a major German bank experiencing difficulties in the market (…) then there would be a recognition that everyone is on the same boat and even German institutions can be affected by this contagion.”
Moody’s also placed the ratings of eight Spanish banks and two holding companies on review for a possible downgrade. The eight are: Banco Cooperativo, Banco Sabadell; Bankia and its holding company, Banco Financiero y de Ahorro (BFA); Bankinter, CaixaBank and its holding company, La Caixa; Confederacion Espanola de Cajas de Ahorro (CECA); Caja Rural de Granada; Ibercaja Banco and Lico Leasing. The credit rating agency took the decision after an increase in the expected loss estimates associated with the exposure to the Spanish commercial real estate market and weakening growth in the Spanish economy.
Both the pound and the US dollar each gained over 1% against the euro despite economists at Standard Chartered, the top-ranked forecasters according to a survey of 350 companies issuing a report stating that they now expect that the UK economy will experience a sharp recession in 2012 with gross domestic product expected to contract at a clip of 1.3%. The report cites economic activity levels in UK being hit by the worsening crisis in Europe, for which Standard Chartered is forecasting a triple shock with, “(the) first being a confidence crisis, consumers spend less, businesses invest less. The second is that banks are tightening credit owing to the credit squeeze and the third is national governments tightening budgets all over Europe.”
These estimates stand in sharp contrast with those from the UK Treasury, which still insists that the UK will narrowly avoid recession, although its independent economists admit there will be a period of very low growth next year. On the upside, Standard Chartered economists are not yet forecasting a global recession (often defined as a growth rate in global GDP below 2%) but rather a rate of expansion of 2.2% in 2012.
They also forecast a still strong expansion in Asia where growth is only expected to slow to 6.5% in 2012 from 7.3% in 2011 and this should suffice to enable the global economy to recover towards the end of the year. “It will be a recovery made in the East and felt in the West. If ever one needed to illustrate the shift in the balance of power, this is it,” said chief economist Gerard Lyons.
The pound also benefited from the lack of UK economic data yesterday. We have, however, a whole raft of data published over the next few days including the latest unemployment data; retail sales; inflation and property market figures and so the pound could give up some of yesterday’s spectacular gains.
