Posts Tagged "european stability mechanism"

Is inflation next?

Posted by on Sep 14, 2012 in Commentary, Market News, News

Is inflation next?

Yesterday evening, Ben Bernanke announced the action the Fed will be taking to provide a boost to the US economy. QE3, or printing dollars at the rate of $40 billion a month will continue until the US economy has better growth and employment. These are commendable goals but we have to ask: is inflation next? However, with more dollars being produced month on month, it means the value of each dollar decreases. As the value of the dollar decreases, the value of other currencies relative to the dollar increase, hence the rise in the value of the Euro over the past week, in spite of the Euro having it’s own issues still. The Euro remains the only other credible world currency to the dollar at this time. More worrying is inflation. The US Dollar is the world currency and all commodities are priced in US Dollars. In theory, assuming a commodity has a constant value, you will need more US Dollars to buy it. The price of a barrel of oil has been rising. Brent crude has risen from a low of $90 back in April to $117 as I write this piece. It has risen $2 since the announcement of QE3. The impact on the price of gold has been even more pronounced. After the US employment figures last week, when non farm payroll numbers were weaker than expected, gold rose by $35 an ounce, or 2% in anticipation of QE3. When QE3 was announced yesterday evening, the price of gold rose again. It is now $75 an ounce more expensive than it was at this time last week, a rise of more than 4%. Suppose these price rises in commodities are representative of things to come. Oil, coal, gas, agricultural products, such as corn, rice, animal feeds, metals like iron ore, platinum and so forth are all going to rise in price, unless there is a corresponding exchange rate fall. As these base commodities rise in price, surely the ripple effect will end up as further inflation for the rest of the world....

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QE3 arrives

Posted by on Sep 14, 2012 in Events, Market News, News

QE3 arrives

This has been quite a momentous week on the currency markets. On Wednesday, the German constitutional court okay-ed the German governments contribution to the European Stability Mechanism (ESM), removing one potential obstacle in the Forex markets. It means the Eurozone countries have a backstop, for now. The Euro is trading close to 1.3100 against the US Dollar as I write this piece. A couple of months ago, the Euro was trading at 1.2250 and heading south. I would not have predicted a rise of this nature. So what has caused it? It is certainly not the strong Eurozone economy, that’s for sure. Well, from the ECB, Mario Draghi has shown some leadership on the Euro crisis and is attempting to solve the issues single handed. He will need some political support in this process. There are many obstacles ahead and the track record over the past few months does not inspire confidence. The real support for the Euro came from the Fed yesterday evening, with the announcement of further quantitative easing, or QE3. This means the Fed is going to start the printing presses again, pumping $40 billion into the economy every month until is gets going and unemployment is down to a reasonable level. So far, much of the money being printed does not seem to flow into economic activity. With consumers still concerned about debt levels, free spending on credit cards and economic growth as we’ve known it remain a distant prospect to...

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Euro and the ESM – a long way to go

Posted by on Sep 7, 2012 in Commentary, Featured, Market News, News

Euro and the ESM – a long way to go

Yesterday’s announcement of unlimited support for the Euro from the ECB was widely expected. Indeed, the leaks have been coming as often as the rain showers. The pre-conditions for the buying of government bonds was also widely trailed. So yesterday’s announcement by Mario Draghi was just the confirmation of what we already knew. The ECB would buy unlimited short dated bonds from governments in financial trouble, as long as those governments confessed and accepted the road of supervision from institutions such as the IMF. This announcement was aimed at preventing Spain and Italy from wreaking havoc in the Eurozone. Yesterday, the value of the Euro flickered but remained largely unchanged. This suggests the move was largely priced in by the markets already. So far, there has been no sign that Spain or Italy are going to seek assistance. So the reality is yet to play out. A far greater test to the Euro stability could come as early as Wednesday next week, when the German constitutional courts make their ruling on the legality of the ESM, the European Stability Mechanism. This is the fund at the heart of the bailouts. Were the German courts to rule against the German contribution to the ESM, the whole Euro project would start to unravel again very quickly. Germany contributes just over a quarter of the €450bn. Although a ruling against is unlikely, the court may impose conditions. That could then lead to more uncertainty. Less than a week to go now to find out the next step in the Euro...

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A little optimism

Posted by on Jul 25, 2012 in Featured, News

A little optimism

Optimism in the markets seems as rare as sunshine in a British summer this year. But as the sun comes out, the temperature soars. Phew, it’s hot right now. The same is true with optimism and the Euro. A few comments this morning about changing the status of the European Stability Mechanism (ESM) by an ECB council member sent the Euro soaring as well. Ewald Nowotny suggested the ESM could be classified as a bank, although no formal discussions have taken place with this objective. The optimism from this simple statement had the Euro appreciating fast against the Dollar. Why does this make a difference? It means the ESM could then raise funds from the European Central Bank (ECB). It would then have, in theory, enough money to bail out Spain and still have some petty cash for Italy, another round for Greece, Cyprus, Slovenia and any other member state running into trouble. Presumably last months statement about central bank supervision of national banks could be extended to ensure the ESM is managed by the ECB. Thus creating more liquidity for governments with lopsided books, you know the sort, the books that don’t quite balance. It is this underlying desire to see some kind of a fix that will work and salvage the Euro that provides many trading opportunities. In spite of a little sunshine today, remember it’s been a very wet, cloudy, cold and miserable summer so...

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