Papandreou steps down and Berlusconi on the brink as Italian Yields Soar

Tom Tong08/Nov/2011Currency Updates

GBP

Sterling has been trading fairly steadily against most major currencies as new data releases fall near enough in line with expectations and as investors flock away from the beleagured Euro zone. David Cameron has told MPs that the UK is prepared to give more money to the IMF, but in exchange the Euro zone must tighten their belts and do what is necessary to see through the agreement reached 10 days ago in Brussels.

Figures for consumer spending in October disappointed and where down 0.9% compared to September. Retailers fear that this may set the tone for a weak Christmas compared to recent years. Today we see Manufacturing and Industrial Production figures coming out in the UK as we look for more hopeful fundamental numbers. The UK banking sector took a knock yesterday as we saw the Lloyd’s banking group show a fall profits of 30% for the first 9 months in 2011. This was due fines of 3.2 billion for miss selling PPI.

EUR

It appears the beginning of the end is drawing ever closer for the beleaguered Euro zone as the sovereign debt crisis takes it hold. The Italian cost of borrowing has risen dramatically over the past few weeks as the third biggest economy in the bloc, behind Germany and France, struggles to raise funds in the international bond markets. Yesterday yields hit a high of 6.68% despite the ECB propping up the sale. This, coupled with uncertainty over Berlusconi’s future has lead to fears that contagion could spread to Italy next and the EFSF is not big enough to backstop the nation failing. Today we see a key moment for Silvio Berlusconi as he faces a make or break parliamentary vote on the 2010 budget report. The outcome of this could see him end his political reign and developments are sure to overshadow the developments in Greece, where PM George Papandreou has agreed to stand down following his opposition to form a new coalition government to approve an EU-IMF bailout package.

The fundamentals coming out of Europe are also shaky as European consumer confidence took a knock and retails sales figures saw a drop across the 27 countries falling 0.3% over the month of September. With France and Spain suffering the biggest fall in sales the grim outlook appears to be reigniting fears that a double dip recession is no longer a question of if but more of a question of when.

USD

The dollar strengthened against 13 of its 16 major peers and treasuries gained before Italian Prime Minister Silvio Berlusconi faces a budget vote. The vote in Rome today will test Berlusconi’s
majority in parliament and determine if the Italian premier has enough support to stay in power and implement austerity measures amid a surge in the nation’s 10-year bond yield to a euro-era record 6.68 percent. Stocks gained yesterday in the U.S. after the European Central Bank’s Juergen Stark predicted the debt crisis will be controlled within two years and as the region’s finance minister pledged to roll out a bulked-up rescue fund next month. The Dollar is again benefiting from ‘risk off’ swings in the market and appears to be taking a background role as the European situation develops.

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Written by Tom Tong

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