EU and IMF are heading towards bringing Greece's budget deficit under control

  European Union and IMF officials will be coming out with the final review with regard to Greece’s defective drive to bring its budget deficit in proper situation. Greece was supposed to start borrowing on financial markets in the next year. However, this plan seems to be less possible. Hence, the EU is working out a new aid plan that would meet Greece’s funding needs in 2012 and 2013. The officials are confirming the Greece’s fiscal progress before approving a 12 billion euro aid. By this new funding package, the country can avoid a default status to happen.

A German weekly magazine, Der Spiegel, stated that by the weekend, Greece might not get the money because of having missed all the fiscal targets set by its lenders. However, Greece and the IMF denied the report and Greece Finance Minister, George Papaconstantinou said that Greek expects that they will end up successfully in the couple of days ahead. As the team of European Union and IMF officials in Anthens is likely to complete the review of Greek Finances, it is important for Papandreou to prevent fatigue from spreading to his own party as its popularity goes down. PASOK has a good majority in the parliament. But one weekend opinion poll showed that it was no more in leading position. This situation has placed for the first time, ever since it won elections in the year 2009...... Read More

OECD wants UK to raise interest rates

The organization for Economic Co-operation and Development is of the opinion that Bank of England should start raising interest rates on a slow pace in order to beat inflation. OECD wants UK to raise its key interest to 1% by the end of 2011 and 2.25% by the end of 2012. It feels that a raise would definitely help to prevent further increases in public inflation expectations. According to the six monthly reports on the Global economy, OECD states that an increase in interest rates should take place during 2011 in order to break off increases in inflation expectations.

In March, OECD had predicted 1.5% of UK’S 2011 GDP growth. But now it has lowered its forecast with regard to UK’S 2011 GDP growth to be 1.4%. Also, the growth estimate for the year 2012 has been also lowered to 1.8%. Previously, it was estimated 2%. Most of the bank’s policy makers feel that the economic recovery is too fragile to withstand a rise in this present situation. Hence, Bank of England has kept the base rate of interest at a low record of 0.5% for more than two years. According to OECD, Global recovery is under way but it is taking place at various speeds across different countries.... Read More

The Stock Market is trading in a sloppy way

The stocks continue to move slowly and traders are going to react on the durable goods orders report. The stock market is now heading for a correction but not in a deeper sense. Analysts believe that the market is trading in a sloppy fashion and it is likely to stay in correction mode for a while. The correction is likely to be felt greater in time than in price. The euro was felt greater in time than in price. The euro was up against the dollar, to some extent. However, its present situation depends on the subject to the next headline. If there is any negative news happening, the euro will immediately drop down. Uncertainties will continue to prevail in the market and there is a negative risk involved. However, if there is positive news such as Greece is going to get new funding, in that case there will be a positive outcome..... Read More

Fitch downgraded Greece by cutting Greece’s credit rating

Fitch, the major ratings agency downgraded Greece after it cut Greece’s credit rating by three notches from BB+ to B+. It further warned of more downgrades if the EU and the IMF do not bother to produce a credible plan for the debt stricken nation. Fitch also warned that a move made to extend the maturities of Greece bonds will be considered as default event. So, any debt profiling/restructuring would thereby result in a default. European Central Bank Executive Board member, Juergen Stark stated in an interview that the idea of restructuring of debt by Greece cannot be considered as a solution to its problems. According to Stark, a debt restructuring would invite enormous problems. With a debt restructuring or re-profiling, Greece is likely to face a situation where it will not be able to gain access to the markets over a reasonable time span. However, if it is regained due to re-profiling or restructuring, Greece will have to pay higher risk premium in the near future. ..... Read More

EU authorities and the European Central Bank doesn’t share the same opinion with regard to Greece’s debt crisis.

According to a recent report in a UK newspaper, the EU authorities and the European Central Bank don’t express the same view point on how to solve the debt crisis in Greece. EU considers a soft restructuring and is in favor of extending the maturities of Greek debts. However, the ECB considers it as unworkable. This is because ECB is worried about the debt situation and thinks that it may erode fragile support for other peripheral nations, including Spain, Irish, Greek and Portuguese. Bond yields continue to be on high level.

Besides the Euro being choppy, investors cannot take a firm decision about the Dollar either. The greenback recovered to a particular extent, after FOMC was released. FOMC members would like to use interest rates for monetary policy...... Continued

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Inflationcould fall faster than the Bank of England’s prediction

The commodity prices have so far gone down by 9% from the peak point, earlier this year. Also, there is constant sliding situation in terms of prices. Hence, there is a possibility if inflation to fall faster than the Bank of England expects in future months within this year. Also, due to weak wages and job crisis, the people’s standard of living is getting squeezed.

The urban middle class is expanding in upcoming economist. This has created a major impact on a wide scale of commodities. The level of consumption in big emerging markets is presently fractions of those in advanced economies. There is still time to see things happening on a common note. Hence, the demand for commodities is expected to remain sturdy for quite some time. The economic recovery situation is going to move along throughout this year 2011. Hence, the commodity prices have been dropping lately.

Every year prices have been increasing and this summer it is going to increase to about 5%. However, the Bank of England is in no mood to raise interest rates with the present economic scenario. Last December, there has been a lot of heavy snow in UK and so the level of output has been flat over the past two quarters. It remained about 4%. Hence, the UK consumers are feeling the heat of high prices without any compensation from a hiring boom or increase in wages. Commodity prices are low, which is about 9%. Oil prices continue to move down. Hence, inflation is expected to fall faster than the Bank of England expectation. Also, based on the UK wage chart, wages are weak and jobs are not increasing in numbers. The standard of living is getting further tighter.   

According to the Bank of England, higher food and energy costs are temporary and this hike in cost will die down. Central Bank has forecasted that CPI will rise to 5% this year. Hence, there is a possibility of seeing a hike taking place in future. The currency remained stable with regard to the IMF managing Director Dominique Strauss- Khan being arrested on sexual assault charges. Strauss- Khan was supposed to attend the EU Finance Minister’s summit which is supposed to be held in Brussels. However, his place has now been replaced by Deputy MD Nemat Shafik.

The Euro recovered some of its losses and was trading above a seven – week low against the dollar currency. The positive output with regard to Euro happened because the European Finance Ministers agreed on a rescue package worth 78billion Euro for Portugal. However, nothing much was done for Greece’s debit crisis. Based on the meeting of European finance ministers, policy makers have come to an understanding that Greek’s sovereign debt load is unsustainable. According to last week, it was partly speculated that the original bail out for Greece could be widened in order to cover up its short fall in the year 2012 and 2013.

It is a known fact that Greece’s debt burden is unsustainable. EU leaders are hoping for some sort of voluntary restructuring or re-profiling of bonds to happen instead of extension of EU/IM loans or a hard restructuring even to take place. The idea of mechanisms being in place for an orderly restructuring to happen will not take place until the introduction of the ESM in 2013. 

Eurocontinues to be pressurized

Euro remains week with the speculation that Greece may have to restructure its debt. This Greece’s debt crisis further deepened after IMF chief Dominique Straurs Kahn was arrested for sexually assaulting a housekeeper in his hotel room. Mr. Straurs Kahn had boarded a flight to Europe in order to meet the German Chancellor, Angela Merkel for discussing in detail about how Europe and the IMF would respond to the bad economic situation in Greece. He was expected to attend the monthly meeting of finance ministers from the 17 nation currency block to have a discussion about the widening debt crisis. However, he was forced to appear in a Manhattan Court. Straurs-Kahn denied the charges made against him. But the Judge did not grant him bail.

It was presumed that with Straurs-Kahn being the head of International Monetary Fund, IMF would continue to support Europe. However, with Straurs-Kahn now being gone, this situation is doubtful. This is the worst time for the International Monetory Fund to be without a forceful European leader. There are now fresh concerns over Greece’s debt issues. Presently the possibility of the situation getting resolved sounds doubtful.

Greece is moving down under a mountain of debt. It is on the verge of asking for more help from European Union and International fund. We have to hope and see the outcome of the two day meeting of EU Finance ministers in Brussels held on Monday. The summit of finance ministers is expected to discuss Greece’s bailout. The meeting will also hold discussions about whether or not it is possible to avoid Greece defaulting on its debt. Greece needs to rework on its debt situation in the coming month.

Treasury secretary, Timothy Geithner told congress officially that the US government hit the debt ceiling. He further said that he is likely retirement funds until Aug 2. This will be done in order to create room for the government for continuing to borrow in the debt markets. Tomothy Geithner also stated that as soon as the debt limit is increased, the funds will be made whole. He further said that Federal retirees and employees will be unaffected by the above mentioned actions. He urged congress once again to raise the country’s legal borrowing limit soon. According to him, this will protect the full faith and credit of the United States and it will avoid catastrophic economic consequences for citizens.

The Pound continues to be under pressure after the Bank of England brought down its growth forecast pushing back expectations for hiking the interest rate. With inflation concerns around Europe continuing to mount, all eyes will be on Wednesdays report. It is going to be with regard to Bank of England minutes, proving traders with a better overview of the committee standing situation on rates. Even though UK continues to have a sluggish growth, there will be mounting pressure on the committee as other European policy makers remain focused on addressing high rising inflation. A higher than forecasted inflation statistics is likely to be seen. You can then expect for a rate hike from the Central bank. This situation will then uplift the Sterling to a certain extent.

 

US Dollargained against most of the traded currencies

The US dollar has become stronger against most of the traded currencies. The main reason of the dollar being strengthened is because of renewed worries about Europe’s debt woes. There is a positive effect on the US Dollar against the euro as the 17 nation currency is hit by news about Greece’s speculating 60B bailout plan and Portugal’s preparation to receive a bailout package.

According to Michael Sheldon, chief market strategist at RBC wealth management, a stronger dollar can make it difficult for US corporations to complete overseas and thereby in turn, cut into profits. The Dollar had dominated over the past six decades. However, it is time now to reconsider the dollar’s historical position. In other words, in future, the dollar may not likely be the world’s preferred currency.

Although the dollar has become a questionable investment, central banks continue to buy and hold US dollars. The main reason is because traditionally US dollar has the capacity to bear market aftershocks and it is considered as “safe harbor” during the time of uncertainty. Even if Euro would be the next option, it still carries significant risk because of the emergency bailouts for the Euro zone nations. Also, the British Pound was considered as the global currency before the Dollar. But in today’s times it is not the case. 

Euro got a brief boosting support from Q1 GDP readings from Germany and France. Euro was under pressure during the entire last week and was kept low due to the concerns over Greece’s debt restructuring. Greece is considered as part of a fixed rate regime within the euro. Hence it cannot be devalued. Hence, the credit risk factor has to be reduced and US treasury allocation has to be increased across all portfolios. It was Die Welt who said that Germany insisted on restructuring of Greece’s debt. However, spokesman Christoph Steegmans stated during the interview that the German government is not aware about the plans for restructuring the Greek debt.

Investors are focusing on short – term changes with regard to the dollar. In recent times, stocks have been moving along with commodity prices. In fact, investors are now trying to find out if the recent decline in commodities is a signal towards weak US economic growth or it is just a temporary phase. According to the report of the government which was released on Friday, the consumer prices rose at an annual rate of 32% in April. The major bulk of increases have been coming from higher prices.

In today’s times, it is not so easy to rely on a particular currency because by anointing any single currency as the reserve currency leaves the investor to be at risk by facing exchange rate fluctuations. Due to an uncertainty, the investors are trying to shift into more defensive areas of the market which also includes sector such as health care, utilities and consumer discretionary stocks. Uncertainty has creep back into the minds of the investors and so they have turn into defensive mode. Such a trend will continue in the week ahead.

An Overviewof current Foreign Exchange Market

The Pound became weak after a Halifax survey revealed that the house prices had their biggest yearly fall in over a year. House prices fell -1.4% in the month of May when it was actually expected to increase to about 0.1% in April. Also, it was expected to see a fall of -3.0%. However, the quarterly rate revealed a fall of -3.7% up to April. The cause of the fall was caused by weak confidence in the economy. There were various other reasons for the fall such as negative wage growth, increasing levels of debt and inability to acquire credit.

The value of Sterling is a matter of concern for most businesses and households. Travelling abroad has become difficult because it has now become expensive. The main reason is due to the drop in value against other major currencies like the dollar and euro. However, UK exporters have accepted this weaker Pound situation because they have come to an understanding that this weaker Pound scenario makes their goods cheaper to foreign markets.  Economists consider this weakening of Sterling situation as much needed correction to the present UK’S trade imbalances.

The UK recovery continues to remain sluggish and fragile. Hence, the pound is not likely to bring a significant change in the market sentiment this week. Also, Bank of England faces rising price pressures while it maintains its recovery trend. Based on the interest rate expectations, the economic data will be predicted.

The Dollar moved ahead in strength because of the consequences of the following rumors of another sovereign debt crisis in Europe. It was also presumed that Greece might need to reform its debt or just abandon the single currency. Since Greece head threatened to leave the Euro, there was a reversal situation caused in the market. The US Dollar index was in a mess after the US data. However, the EU news gave a boost to close up 1.1%.

Since, there has been a slow down in the economy’s growth pace in the US this year, it is doubtful to consider the payroll’s growth of 200K+ to be sustainable. The latest payroll news is considered as good news. However, the fact remains that the jobless rate outcome will still persist. In other words, the unemployment level will still exist around 9% for quite some time.