Eurozone debt crisis continues

Press release
Published June 26th, 2011 - 10:50 GMT

The US Dollar surged against a basket of currencies towards the end of the week as investors dumped risky assets mainly due to heightened fears emerging from the Eurozone. The strength was also due to the Federal Reserve offering no hope for additional quantitative easing for now. After reaching a high of 1.4442, The Euro plummeted on Thursday to reach a low of 1.4127 against the Dollar, on fears that the EU might not provide the second bailout package to the debt-burdened country. The Euro recouped some of its losses by Friday, as the EU leaders agreed to grant Greece a second bailout with condition that its parliament passes a new austerity package. The currency ended the week at 1.4188. Similarly, the Sterling Pound dropped after the Bank of England voted to keep interest rates at record low, even if inflation has reached twice the bank’s target. After reaching a high of 1.6263, Cable dropped to a low of 1.5939 and closed the week at 1.5959.

The Japanese Yen continued range-trading. After opening at 80.15, it reached a high of 80.80 and closed the week at 80.43 after the Bank of Japan posted the second consecutive trade deficit.

The Swiss Franc continues to trade at historical levels, in parallel with the Eurozone problems. After opening at 0.8485, CHF ended the week at 0.8331.

Housing data disappoints

Sales of previously owned U.S. homes hit a six-month low in May, indicating that the housing market is still struggling to regain its footing. Existing Home Sales fell 3.8% to 4.81 million units annually from a previous 5.00 million units, meeting market expectations. Similarly, New Home Sales fell in May for the first time in three months, reinforcing the view that the sector is struggling to gain momentum. Sales dropped 2.1% to 319,000 annually last month.

FOMC Interest Rate Decision

Federal Reserve officials decided to keep the central bank’s balance sheet at a record to spur the slowing economy after completing $600 billion of bond purchases this month. “The economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected,” Fed Chairman Ben Bernanke said at a press conference after the Federal Open Market Committee meeting. In addition, the Committee lowered their growth forecasts for this year and next, as well as raised their estimates for the unemployment rate. Furthermore, Bernanke said that unemployment, currently at 9.1%, would come down “very painfully slowly” even after the pace of economic growth picks up in the second half of this year. Some of the reasons for the slowdown, such as higher commodity prices and supply-chain disruptions caused by the March earthquake and tsunami in Japan, will be temporary, he said. Others, including declines in home prices and financial-sector weakness, may be more long lasting.

Initial jobless claims rising

More Americans filed for unemployment benefits last week, highlighting the concerns expressed by the Federal Reserve Chairman Ben Bernanke that the slowdown in the economy might persist. Claims rose by 9,000 to reach 429,000 versus expectations of a drop to 414,000.

Europe

Second bailout for Greece

Global stock markets bounced back on Friday after European Union leaders reached an agreement on a long-awaited lifeline for Greece, expected to total up to €120bn.

European leaders agreed on Thursday night to launch a fresh aid package for Greece following last year's €110bn bailout, assuming the recession-hit country passes an austerity package that would see higher taxes, lower public service salaries and the privatization of a range of government assets. Without the final €12bn tranche of last year's rescue from the Eurozone and the IMF, Greece would be broke by mid July.

PMI Manufacturing & Services

Eurozone Manufacturing and Services PMI data dropped more than expected, raising concerns over slower growth in the peripheral European economies. The data comes a day after European Central Bank President Jean-Claude Trichet said the warning lights were flashing red on the Eurozone debt crisis.  The weak data also raised concerns whether the ECB will continue with its monetary tightening cycle. The Manufacturing PMI came lower than expected at 52.0 from a previous of 54.6. In parallel, the services PMI fell to 54.2 lower than the expected 55.5.

Economic sentiment in the Eurozone

German business sentiment rose unexpectedly in June, showing that the economy is still outpacing its European peers. Firms on the other side were the least upbeat about the future in more than a year, pointing to slower growth in coming months. The IFO business climate index rose to 114.5 in June from a previous 114.2 in May and in comparison to an expectation of 113.5. In addition, the ZEW Economic Index dropped in June to the lowest level seen in more than two years as the Euro area’s debt crisis continued. The index fell into negative territory for the first time since October 2010 at -9.0 points compared to 3.1 in May.

United Kingdom

MPC Meeting

The Sterling Pound fell shortly after the Bank of England minutes showed that some policy makers see a potential need for further bond purchases as the economic recovery struggles and “downside” risks to growth and inflation mount. For the majority of the nine-member Monetary Policy Committee, “the fiscal challenges in the Euro-area periphery highlighted the potential for further adverse shocks to demand,” according to minutes of the June 8-9 meeting published last week. The MPC voted 7-2 to keep the benchmark interest rate on hold and 8-1 to maintain the bond purchase program at 200 billion pounds, with the majority saying the “current weakness of demand growth was likely to persist for longer than previously thought.”

Japan

Trade Balance

Japan's trade balance posted a deficit for a second straight month in May, affected by continued drops in car and electronics exports, while manufacturers are scrambling to restore quake-hit production facilities and supply chains. Japan logged a trade deficit of Y853.72 billion in May, compared with a surplus of Y309.13 billion a year earlier and a revised shortfall of Y464.84 billion in April. Japanese exports dropped 10.3% in May from a year earlier to Y4.76 trillion, after falling a revised 12.4% in April, marking a third straight month of year-on-year declines.

Background Information

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