CLOUDS OVER EUROPE

By Andrew Wilkinson at IB:

With travel plans across Europe scuppered by a cloud of volcanic ash from Iceland, I’m not sure how many of the zone’s finance ministers will actually make the journey to Madrid to discuss Greece. The nation struggling to raise €11 billion before the end of May has called for joint talks starting Monday with the EU, the ECB and the IMF in what a Spanish minister referred to as “a step closer” to requesting financial assistance. Pressure remains on the euro as a result of mounting pressure on Greek and other peripheral bond prices as investors demand ever-increasing yield premiums to hold bonds issued by highly indebted sovereign nations.

Euro – Farmers in parts of Europe have been advised to keep livestock indoors where possible to prevent animals from grazing on fallout from the Icelandic dust cloud containing particles of pulverized rock and glass. That sounds about as palatable for the euro as a proposed lawsuit from a group of German professors in the event that German politicians vote to provide taxpayer money to bail out Greece. According to one French bank the outlook for the euro is disastrous if Germany makes available taxpayer money in a move, which could “catapult Germany out of the currency union.”

And while the euro is weaker today at $1.3527 it still hasn’t yet backed down to its highest level of $1.3500 from Friday as rumors leaked of a deal for Greece last week. (Since I finished today’s commentary the euro has indeed filled that gap down to $1.3491 according to Interactive Brokers data.) Granted, the odds are the market may fill that gap today, but the point remains that the single currency unit is far from in free fall at this point on accelerating worries over the mechanics of how Greece gets cash in its coffers by side stepping an already jittery bond market.

Japanese yen – The weakness in domestic and regional stocks has helped revive the notion of risk aversion and pushed the yen sharply up against all the majors. It has gained to ¥92.71 per dollar, to ¥143.00 per pound, to ¥125.22 per euro and to ¥86.27 per Aussie dollar.

U.S. Dollar – Global stock market weakness was probably to be anticipated hot on the heels of a surge in first quarter output in China. News released yesterday showed that China grew at an 11.9% pace, which inspired immediate remedial measures in the housing market. The demand for dollars and yen picked up in light of stock market weakness overnight. The dollar index continues to recover from earlier in the week losses.

Aussie dollar – The Chinese took a pot-shot at property market speculators hot on the heels of rip-roaring growth. The March rise in real estate prices was the highest on record and inspired the authorities to raise the minimum deposit on certain purchases to quell speculation and to maintain a more orderly market place. The Aussie dollar suffered from a bout of profit-taking and is trading at 93 U.S. cents this morning.

Canadian dollar – The resurgent greenback has pushed back the advance of the Canadian dollar, which looks set to end the week below parity at 99.50 U.S. cents.

British pound – Ever seen a three-legged horse race? Well that is what is helping drive the pound lower versus the dollar today after a televised political debate proved the outsider, Nick Clegg of the Liberal-Democrats a clear winner. Some 61% of an audience polled in the aftermath of the debate had Clegg as the best performer, elevating worries over a clear outcome. It’s typical in Britain that domestic politics is dominated by the two main Labour and Conservative parties. The Liberals have always been also-ran candidates. But apparently the party has some appeal after its leader talked more sense than either Goliath on this occasion. The pound slipped to $1.5413 against the dollar.