Cyprus goes cap in hand to the EU/IMF!

Week commencing Monday 26th November 2012

Overriding Market Themes

Cyprus continues to make steps towards a rescue deal, with a government spokesman stating that the agreement could be completed by the end of the week. The south Mediterranean country has been hit hard by its banks, all of which have suffered losses due to their heavy exposure to neighbouring Greece via financial and trade links. In total, Cypriot banks have outstanding liabilities and debt totalling 152bn euros. The bailout deal is expected to include 17.5 billion Euros of loans is roughly the same size as the countries entire economic output, and makes Cyprus the sixth EZ country to receive such a bailout. 


The US economy is going to expand modestly in the next few months, according to the latest data from the Conference Board. The boards leading indicator showed a 0.2% increase in October, following on from a 0.5% increase in September and a 0.4% decline in August. It has warned however that its figures did not take full account of the effect of Hurricane Sandy or the outcome of the Fiscal Cliff debates. Another indicator was the University of Michigan’s consumer sentiment index for November, which came in at 82.7. This figure was down from the preliminary figure of 84.9 and barely changed from October’s figures.


The Brussels summit has ended without agreement on the 27-strong union’s next 7 year budget. In true EU style, the divisions were very clear and have become even starker as countries struggle to find direction. It seems that, for once, both the UK and Germany agree on the future of the EU budget, with both calling for further cuts in the budget proposed. France, Spain and Italy on the other hand, were keen to defend the EU’s biggest spending projects. Failure to agree on the budget by the end of next year would mean rolling over the 2013 budget into 2014 on a month-by-month basis, putting some long-term projects at risk. Many analysts say that this could leave the UK is a worse position as the 2013 budget is bigger than the preceding years, adding even more pressures on David Cameron’s premiership from his back benchers.


Back home, the Chancellor of the Exchequer may have to extend his austerity program by another year to 2018 after further deterioration in Britain’s economic prospects. In a report published by the Institute for Fiscal Studies, Osborne is stated to be on course to miss his target of seeing the burden of government debt falling by 2015, and further tax increases and spending cuts may be needed to wipe out the structural deficit in five years. This is not welcome news to the Chancellor, who is preparing to deliver his autumn statement to Parliament on 5th December, which will be based on an assessment from the government’s independent fiscal watchdog, the Office for Budget Responsibility. 

GBP This Week

Tuesday sees the Sterling data set kick starting, with the Revised GDP for the quarter due out in the morning. I expect the Office of National Statistics to post a GDP growth figure of 1%, indicating that the economy is broadly growing in most sectors, albeit slowly. We then move to Thursday, when Bank of England Governor, Mervyn King, is speaking to the press about the Financial Stability Report. I expect some more rhetoric about the potential of increasing the banks quantitative easing program, which I would imagine we will see in Q1 2013. Apart from these two events, it should be relatively quiet for the pound, with international events providing the most interesting moves of the week.

USD This Week

This should be a big week for the Dollar, with Durable Goods and Consumer Confidence starting the ball rolling on Tuesday. I expect Durable Goods to come in around -0.6% against a previous figure of 1%, with the drop mainly attributed to a general decline in orders as the fiscal cliff weighs on businesses investment plans in the second half of 2012. Wednesday’s New Home Sales should come in reasonably flat against the previous release of 389k, whilst Thursday’s Unemployment Claims and Preliminary GDP releases seem to be the highlight. GDP should come in at a healthy 2.8% whilst fewer Americans filing applications for unemployment benefit, despite the lingering effects of Sandy. 

EUR This Week

Thursday’s Italian 10 year bond auction is possibly the highlight of the week, where I expect yields to remain relatively stable around the 4.8%. The Eurogroup meetings are set to continue today, so we should have some idea whether any decision will be made this year by the close of play. I suspect the deadlock will continue, so expect markets to react violently to political news as leaders look to limit the political damage.  

In Other News

North-East England and Northern Wales are bracing itself for further flooding as a major weather front continues to move north. There are about 250 flood warnings and 300 flood alerts in England and Wales now, with reports already showing that 816 homes have been flooded already in the south. It seems the worst is still left to come, with many people criticising the level of preparation that local councils have done to protect towns and villages. Meanwhile, another type of storm is brewing in Westminster, with top Tory MP’s suggesting a pact with UKIP to try and prevent them threatening the conservatives at the next election.  


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