Forex News | Currency News by Forexlive

Thanks to Spooner for the link to the Business Spectator which has a neat summary of the ECB’s stability report which does not read well for European banks. I’m surprised that the EUR is not already significantly lower. Either the market has been on holiday and will start selling again today or alternatively the market is already so short it cannot sell any more. Let’s wait and see which is the true state.

We have stalled here between .8425/50 now on so many occasions that my tendency is to believe that the big .84 level is going to hold but I’m hearing a different story from the marketplace. There is an increasingly large amount of option protection being bought with puts around the .8300/25 level very popular. This started mid last week in London and has continued over the last week according to my sources. Obviously some bigger players are of the view that .84 might hold but if it doesn’t, watch out.

–Costs Continue To Rise, But Selling Prices Continue To Drop
–Firms Plan To Reduce Capital Spending, Pessimistic On Investment
–Survey Shows Consumers Remain Leery Of Discretionary Spending

LONDON (MNI) – Sales and profits for UK service sector firms
disappointed expectations over the past three months, a Confederation of
British Industry conducted between April 28 and May 12 found.

Firms selling services to consumers saw their volumes of sales fall
in the past three months, while sales volumes in business and
professional services remained flat, disappointing previous
expectations, the latest CBI Service Sector Survey shows.

The survey covered 151 service sector firms.

The survey covers business services firms, such as accountancy,
legal and marketing firms, and consumer services, such as hotels, bars
and restaurants, travel and leisure.

The value and volume of business in consumer services fell in the
last three months, having risen slightly in the previous quarter, the
CBI said. A negative balance of 21% reported weaker business volumes and
there was a balance of -5% for value.

Firms considered their level of business, in both volume and value
terms, to be well below normal in the past quarter. The overall
profitability of firms selling services to consumers fell, with a
balance of -34%, the most negative since August last year.

The rate at which prices rose (+18%) was slower than expected, but
there was a faster-than-expected rise in costs. This quarter the balance
saying costs rose was +20%, and a balance of +26% expects an increase in
costs next quarter, the highest since November 2008.

In Business and Professional Services, the volume of business was
unchanged on three months ago, which disappointed expectations of an
increase, whereas the value of business rose slightly, with a balance of
+8%.

Firms’ selling prices continued to fall and, although the balance
of -20% was the least deflationary since November 2008, at the same time
their costs increased at the fastest rate since August 2008 (+28%).

After seven quarters when staff numbers fell in Business and
Professional Services, there was little change in the past three months.
In Consumer Services, employment fell compared with three months ago.

Ian McCafferty, CBI Chief Economic Adviser, said: “These figures
for the UK service sector show there is some way to go before the
recovery gets up to speed, and firms selling services to the consumer
are finding it tougher than those in business and professional services.

“Consumers are still being cautious about spending on discretionary
activities like eating out in restaurants or bars, and leisure and
personal services, such as haircuts or beauty. But it is interesting to
see that travel services firms are doing better, which suggests people
still want to take a well-earned break.

“Firms selling business and professional services are feeling
slightly more optimistic than three months ago, but are still finding it
hard to make a profit, as prices continue to decrease and costs
accelerate. These firms no longer expect volumes of business to grow in
the next three months.”

“Firms are generally planning to reduce capital expenditure in the
coming year…There is a lower-than-average interest in capacity
expansion as a reason to invest across the sectors, and greater concern
that the net return on investment will prove inadequate”.

– London newsroom: 00 44 20 7862 7491; e-mail: dthomas@marketnews.com

[TOPICS: M$B$$$,M$BDS$,M$$FI$,MT$$$$,MABDS$]]

Interesting article here from Bloomberg on the widening spread between yields on Chinese property company bonds and US Treasuries. Just as nobody quite understood the ramifications of a US sub-prime market collapse before the event, we are in the same situation regarding the Chinese market. In any event, it could not be overly good for the AUD.

This level was mentioned in the comments below so if it goes pear-shaped then blame Gringo whereas if it proves successful, then I’ll take all the accolades.

There is the possibility of a basing formation emerging and this is backed up by the order boards with (seemingly) a lot of bids now emerging below 1.2250. The levels to watch are 1.2230/40 firstly and of course the recent lows at 1.2145. If the market fails to break below 1.2230 and starts forming an hourly low, it might be a signal for the EUR/USD bottom pickers to jump on board for a hopefully fast ride back towards 1.30.

For those out there who point to the terrible fundamental outlook I will say that the outlook was exactly the same when the EUR/USD was at 1.50, only the sentiment hadn’t quite turned yet. Price is important.

Yesterday we saw a survey from Bloomberg where the 22 analysts surveyed all said that the RBA is likely to pause in its tightening cycle when they meet later this morning. That may well be the case but the general consensus is also that rates will rise by another 50 bps before the year is out.

The AUD/USD is close mid-range this morning with corporate bids seen towards .8370 and offers noted around .8570.

Thanks Marty for the link to Der Spiegel which suggests some significant tension between the Germans and the French. The Germans seem to be paying a large part of any rescue package and the French are trying to save their own skin. Is that the sound of history repeating!

Unsurprisingly most of the major pairs are where we left them yesterday although there were of course a few last minute fund manager flows. USD/JPY failed in its attempt to break above 91.60 and has now posted an ‘outside’ month, which is bearish in some eyes but less effective in a sideways or bearish trend in my view. Cable has rebounded after the stop-loss driven sell-off yesterday morning and the others are more or less unchanged.

Good luck today.

BERLIN (MNI) – The significant near-term funding requirements of
Eurozone governments could crowd out issuance of bonds by banks, thereby
raising the possibility of a setback to the recovery in banking sector
profitability, the ECB said it its latest Financial Stability Review
released Monday.

The rise of aggregate Eurozone long-term real interest rates in
recent weeks to levels not seen in at least a year suggests that the
likelihood of their impinging on the nascent economic recovery and the
sizeable refinancing requirements of banks is beginning to rise, the ECB
observed.

“In view of the considerable near-term funding needs of euro area
governments, a particular concern is the risk of bank bond issuance
being crowded out, making it challenging to roll over a sizeable amount
of maturing bonds by the end of 2012,” the central bank said.

Yet, not only do higher sovereign funding costs raise banks’ own
funding cost of funds, they also create the risk of losses on leveraged
government bond positions such as yield curve carry-trades, the report
warned.

ECB Vice President Lucas Papademos, asked about the recent
downgrade of Spain’s sovereign debt by Fitch Ratings, said it had been
expected and noted that Spanish government paper still had a high rating
of AA+. He added that the situation in Spain is “is quite different” to
that of Greece.

Looking further ahead, ECB report argued that the deterioration of
public sector balance sheets can create risks for longer term economic
growth by raising precautionary savings to shoulder the risk of future
fiscal correction, thereby lowering future investment and productivity
growth.

The inevitable fiscal contraction can also impinge on the prospects
for financial sector profitability and soundness, it added. Nonetheless,
“it is essential that governments implement fiscal consolidation to
ensure the sustainability of public finances,” the ECB stressed.

Large fiscal imbalances call for significant fiscal consolidation
efforts over the medium term and this will also require that governments
ensure timely exits from financial sector support, the central bank
demanded.

“The legacy for the period ahead is the considerable curtailment of
the room for fiscal policy manoeuvre in the future, should another
episode of systemic risk materialise,” it observed.

Commenting on financial market regulation, the ECB said proposals
made recently by former U.S. Federal Reserve Chairman Paul Volcker would
not be ideal for Europe.

The so-called Volcker rule aims to prevent banks that have access
to central bank and deposit insurance facilities from trading on their
own account, as well as from owning and investing in hedge funds and
private equity.

The introduction of a Volcker-style rule could hinder the smooth
provision of financial services in the EU, the ECB argued. Moreover, it
might trigger unintended effects such as the migration of riskier
activities to less regulated areas of the financial system.

“Against this background the functional separation does not seem
the most promising way forward in the European context,” the central
bank said.

Overall, it appears more promising to extend supervision and
regulation to a wider range of potentially riskier activities, it
reckoned.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

[TOPICS: MGX$$$,M$X$$$,MFX$$$,M$$EC$,M$$CR$,MT$$$$]

BERLIN (MNI) – Banks in the Eurozone have significantly improved
their financial situation but banking sector profitability is likely to
remain moderate over the medium term, the European Central Bank said in
its latest Financial Stability Review released Monday.

The two most important risks to financial stability are a
persistence or even intensification of concerns about the sustainability
of public finances, with an associated crowding-out of private
investment, and the possibility that the adverse feedback between the
financial sector and public finances could continue, the report stated.

Outgoing ECB Vice President Lucas Papademos, briefing journalists
about the report on his last day in office, warned that “downside risks
to growth could increase” due to the risk of such feedback.

There is “no room for complacency,” Papademos warned. Echoing
language from the ECB report, he noted that sizeable loan losses are
still expected through next year and could be a “lasting drag” on bank
profitability. “The situation has improved, but there are still
challenges ahead,” he said.

Papademos said there were a small number of banks still dependent
on public support and that they would have to restructure to become less
so. There are also relatively few banks still reliant on ECB liquidity,
he said, but he declined to specify the types of banks concerned.

On the subject of feedback between markets and the real economy,
the ECB report noted that there is a risk of heightened financial
volatility if macroeconomic outcomes fail to live up to expectations. “A
key concern is that many of the vulnerabilities highlighted in this
Financial Stability Report could be unearthed by a scenario involving
weaker-than-expected growth,” it said.

Uncertainty regarding the economic outlook of the Eurozone
“continues to remain elevated,” the central bank acknowledged. Still,
risks to the macroeconomic outlook appear to be broadly balanced, it
said.

Less tangible concerns include the possibility of vulnerabilities
being revealed on the balance sheets of non-financial corporations and
of greater-than-expected household sector credit losses should
unemployment remain higher than currently expected, the ECB said.

The central bank noted that many of the large and complex banking
groups in the Eurozone returned to modest profitability last year and
that their financial performances strengthened further in the first
quarter of 2010.

“This, together with a bolstering of their capital buffers to well
above pre-crisis levels, suggests that the bulk of these institutions
have made important progress on the road to financial recovery,” the
report stated.

Still, it cautioned that the profitability of some large financial
institutions receiving government support remained relatively weak.

Potential loan write-downs confronting the Eurozone banking system
will likely peak this year, the ECB predicted. Yet, “it is probable that
loan losses will remain considerable in 2011 as well,” it said.

Eurozone banks may need to set aside provisions for an additional
E123 billion in loan losses this year and around E105 billion more in
2011, the ECB predicted.

The expected loan losses constitute a “significant and lasting
drag” on banking sector profitability and give rise to the risk that
“the recent recovery of profits will not prove durable,” the central
bank reckoned.

Banking sector profitability is likely to remain moderate over the
medium term also due to pressure on banks from markets and supervisory
authorities to keep leverage under tight control, the report asserted.

The ECB also noted that the maturity structure of interest options
prices suggests that there is “a broad base of financial institutions”
that may not be sufficiently well prepared for a yield curve steepening,
which could be triggered, for example, by a further intensification of
sovereign risks.

Concerns remain also about pockets of vulnerability within the
banking sector connected with exposure to weakened commercial property
markets and fragilities in some central and eastern European economies,
the ECB noted.

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