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Opa!
By Mike Conlon | May 10, 2010
Let the party continue… Greece lives to party another day, as does the rest of the Euro zone! Over the weekend, the EU finally came to the rescue of the faltering nations of the region by putting together a nearly $1 Trillion (yes that’s trillion with a ‘T’) rescue package to stabilize the Euro and defend the EU. The package consists of both pledges from the solvent EU countries as well as IMF backing. In addition, there will also be access to an emergency funding vehicle, and the ECB will engage in quantitative easing to start buying bonds to provide liquidity.
This is the type of response the market was hoping for, after the bungling of the situation that had taken place until this weekend. As a result, world markets are higher as there is now hope that the Euro will not collapse.
However, as good as this may be for the Euro in the short-term, many are starting to question where exactly all this money is going to come from as nations step up to use this new facility. This could mean a lower Euro in the long-term. Because this move is seen as stabilizing, the markets are seeing some risk appetite this morning as well as some short-covering.
In the forex market:
Aussie (AUD): The Aussie is higher this morning as much of the fear that was in the market due to Euro concerns has abated. A note out by two former policy-makers has stated that perhaps the RBA has raised rates too fast in Australia with global concerns still pervasive. The potential slowdown in China could pose a risk to the Australian economy.
Loonie (CAD): The Loonie is higher this morning as traders are increasing bets that the Bank of Canada will raise rates in June. Lost in the quagmire of last week’s market turmoil, Canada reported a record job growth figure rising the most in 1 month in nearly 35 years! With the Euro zone debt crisis seemingly contained, the good economic story coming out of Canada is back to the fore-front of investor’s minds.
Kiwi (NZD): Like the Loonie, the Kiwi is higher as they too had good employment reports from last week that were overshadowed by the risk aversion in the market stemming from the Euro debt crisis. And even though the RBNZ left rates unchanged at the last policy meeting, mid-year expectations for a rate hike are “in-line with the RBNZ’s current views” according to Governor Bollard.
Euro (EUR): Obviously the big news is the bailout proposed for the region, but there were actually some good economic figures that came out in Germany. Chancellor Merkel’s government lost seats in the weekend election, so perhaps that prompted her to agree to the bailouts knowing that her days may be numbered. In the meantime, the Euro is back to just under 1.30 vs. USD and hopefully this bailout package will be enough to keep the region from falling into an economic death spiral. While the market sees the benefit of this aid package, perhaps enacting this sooner could have kept the Euro from the edge of the cliff. Now it will be interesting, to see to what extent these bailout facilities need to be accessed and where the actual money for said bailouts is going to come from. In my opinion, while the short-term news is positive for the Euro and world markets in general, this is most definitely a negative for the Euro in the long-term.
Pound (GBP): The Pound is higher as the market has deemed that it has better growth prospects than the Euro. Growth in consumer confidence and home-loan approvals in conjunction show that the UK economy is improving as the new government prepares to take over. While the fears of hung Parliament have been realized, the new government appears to be working toward coming to agreements that the UK debt load must be reduced. While there is no coalition in place as of yet, the willingness to work together may be enough to help the economy. In addition, the BOE left rates unchanged.
Dollar (USD): The markets are still jittery after last Thursday’s ridiculous market move that still has professionals scratching their heads as to what actually happened. Congressional hearings are bound to occur to get to the bottom of it. Economic news for the US is light until the end of the week when we get retail sales figures. So expect the dollar to move somewhat opposite of the Euro as the market gains or loses confidence in the EU.
Yen (JPY): Expect the Yen to trade on risk themes after the BOJ injected a major amount of liquidity last week to the market. There was a note out of the BOJ that said the Japanese economy has not been affected by the Euro debt crisis so the economy will continue to chug along, albeit at a snail’s pace.
This Euro zone bailout package was exactly what the market was hoping to hear months ago. While the Euro has received a short-term boost of confidence, the long-term prospects of a weaker Euro seem likely. And for all of the noise coming out of Germany, the stand to benefit the most as a weaker Euro is better for their exports. They are already seeing gains in exports and their current account deficit.
Had the politics been put aside and this deal hammered out months ago, then it is highly probable that borrowing costs could have been contained better throughout the region.
So it is going to take time for the wounds of the Euro debacle to heal, but every day that goes by without crisis is another day of confidence for the Union. If they can create enough confidence for the region, then it may be possible, though unlikely, that the nations in trouble will need to access the bailout facility. Expect austerity to spread throughout the PIIGS nations and for their economies to get worse before they get better.
But hey, at least it’s not financial Armageddon. The EU lives to party another day!
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