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Forex markets await the stress test PDF Print E-mail
Written by Mark Deans at MoneyCorp   
Friday, 23 July 2010 09:39
Mark Deans at MoneyCorp gives his morning verdict on the forex markets.

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Good morning.

There has been no abatement of President Obama's War On British Petroleum. Britain's former prime minister, the former home secretary and BP's CEO have all been 'invited' to appear before a senate inquiry.

Will it turn into an invitation they cannot refuse? It would be richly ironic if Tony Blair and his team were to fall foul of the lopsided Extradition Act they signed into law in 2003. Maybe there will be a trade-off, with George W Bush and Donald Rumsfeld giving the Chilcot Inquiry the benefit of their recollections.

And maybe there won't, but if the rumours are correct there does seem to have been a trade-off in the presentation of the EU's bank stress tests.

Two days ago there was a story that German mortgage lender Hypo Real Estate would need new capital. Now it seems that some of the 27 Spanish banks - small, local-government-owned ones - will have failed as well. To see some banks fail should, in theory, enhance the credibility of the test (as long as the failing banks are little ones that nobody deals with).

But there is another bone of contention. In principle, when the CEBS publishes the results at teatime today it will include details of the tests' criteria. Some investors worry that those details will be too sketchy.

In particular, they worry that there will be no test of banks' exposure to sovereign debt. But let's look on the bright side as well: When the US authorities ran similar tests last year they published the metrics they had used. During the following six months US bank stocks went up by a third. If the EU results are just as comprehensively reported they might have equally as positive an effect.

In the meantime there is the whole of Friday to get through. The picture yesterday was generally positive for risk and negative for the US dollar and yen. Provisional euro zone and German purchasing managers' indices all came in better than expected, as did the 3.8% monthly rise in Euroland industrial orders and the three-point improvement in consumer confidence.

UK retail sales beat the forecast with 0.7% increase in June. Even US existing home sales exceeded expectations. Admittedly they were very pessimistic expectations; instead of falling by -10% in June, sales were down by only -5.1%. The only truly disappointing figure came from Canada, where retail sales fell by -0.2% in May instead of rising by more the 0.5% that analysts had predicted.

Germany leads off this morning with the IFO survey of business confidence. Half an hour later the UK serves up BBA mortgage approvals and the first estimate of gross domestic product growth in the second quarter. The market expects to see a pick-up in the pace of expansion with quarter-on-quarter growth doubling to 0.6% from Q1's 0.3%. Canadian inflation figures wrap up the day early: a slight acceleration is expected, from 1.8% to 1.9%.

The will be considerable interest in Britain's GDP numbers. For the last three quarters analysts have been overoptimistic in their predictions. On each occasion the pound has come under pressure as a result of investor disappointment. There is also bound to be talk today that Q2 is likely to mark a high point for growth; it will not be so easy to come by when the austerity budget begins to bite.

Similarly, the market will take a great interest in the results of the EU bank stress tests. Will a few, obscure banks' failure reassure the world that European banks are solid enough to withstand a financial crisis? Or will there be deep suspicion that most of them were not considered solid enough to be tested for the effect of a sovereign default?

Bear in mind that, although the European markets will be closed when the results are published, New York will still be open. If the results do raise any eyebrows, things might become choppy.

The octopus it still on holiday.

Have a good weekend.



Last Updated ( Friday, 23 July 2010 09:42 )