Spanish fears and stalling of US economy weigh on risk assets ahead of Facebook IPO

Tom Tong18/May/2012Currency Updates

GBP

Sterling hit a 6 week low versus the safe haven dollar on yesterday on worries about Greece and fragility in the Spanish banking sector, with investors also bearish on the pound after the Bank of England cut UK growth forecasts.

We also saw the pound fall against the euro, which again underperformed most other currencies on concerns over eurozone debt.

The pound later pared losses against the dollar after the Federal Reserve Bank of Philadelphia’s business activity index came in much weaker than expected for May.

The BoE Inflation Report highlighted risks to the UK economy from the eurozone crisis and downgraded medium-term inflation forecasts, which could be used to justify printing more money to buy bonds, seen as negative for a currency.

But in an interview yesterday, BoE policymaker Paul Fisher said the central bank should only do further quantitative easing asset purchases if the economy seems to be slipping into a deep recession, which does not appear to be the case just yet.

EUR

The euro yesterday received another major shock as Moody’s conducted sweeping downgrades of Spanish banks. The Spanish government called for calm amongst investors as shares in Bankia collapsed by 30%. Moody’s downgraded 16 Spanish Banks, including cuts by three notches for the 3 largest lenders. The credit rating agency claimed this was due to the deteriorating Spanish economy, and reduced credit worthiness of the Spanish government.
Earlier, Spanish newspaper El Mundo reported that customers had withdrawn a total of €1bn of deposits from Bankia following its part-nationalisation last week. This has amplified concerns about eurozone banks following the sharp increase in withdrawals from Greek banks that has been reported recently.

These fresh concerns over Spain yesterday helped push the euro down to a new four-month low against the dollar.

Further concerns have been raised that Cyprus may require a bailout after its government announced it would underwrite the €1.8bn capital raising by Popular Bank of Cyprus.

Perhaps the most interesting indication of a possible Grexit has been that De La Rue, the company that prints currency notes for many major global currencies, has begun to prepare itself to start printing Greek Drachma.

USD

The dollar gained from haven demand again after risk assets came under a renewed assault on the back of further concerns over Spain. Risk sentiment also took a hit yesterday after a fresh round of disappointing US economic data. The Philadelphia Federal Reserve’s May business confidence indicator fell to its first negative reading since September, which was a large downside surprise. This has followed further indications that the US recovery may be stalling, after last week’s flat initial jobless claims data, and April’s economic indicators shrinking for the first time in seven months.

However, investors are now wary that if these trends continue into June’s Federal Open Market Committee, we could see the door open for the Federal Reserve to provide more accommodation to replace the expiration of Operation Twist. Further monetary easing in the US would be seen as a negative for the dollar, and this has been priced in slightly into the markets as yesterday we saw demand for gold spike off Wednesday’s four-month low, jumping 2.4 per cent.

In other news, today we shall see Facebook’s much anticipated IPO, where the share price has been set $38. It will provide some much needed relief from the concerns in the eurozone as all eyes will be firmly fixed on Facebook, with the official share price giving the company a total valuation of $104bn.

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Written by Tom Tong

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