Risk remains, markets nervous

The Contagion effect within the EU as a result of the continuing crisis in Greece is getting more and more serious. Both Portugal and Spain are being affected by the fallout from the crisis in Greece with Italy deemed not a long way off the market’s radar. Comments emanating from participants following the close of the G7 Finance Ministers’ get together in Iqaluit, Canada at the weekend. The message was that there would be a “European” solution to the current problems and no requirement for an IMF bail-out, but that Greece would have a heavy price to pay for consistently breaking the EU’s self imposed rules. The German finance minister, Wolfgang Schaeuble, stated that he did not see the problem’s undermining the Euro going forward adding that ‘markets always tend to over-react’. Following this, the markets have continued to ‘over-react’ with euro/dollar erring on the soft side once more in early Far East trade. A slight recovery in Asian stock markets, following Wall Street’s 10 point closing gain on Friday, has added a small floor for the euro but it would be a brave trader to be the first one in selling Dollars in the present risk-averse climate.

Following the very disappointing non-farm payrolls figures from the US on Friday afternoon, Sterling had held on bravely, in the face of the again rampant Dollar, and reinforced its recent gains against the Euro. Comments this morning in Sydney from Dr Mohamed Abdulla El-Erian, the CEO of PIMCO, served to undermine the Pound however. He stated that the UK is the Sovereign state currently most at risk of losing its AAA rating – a view that echoes a previous comment made by the company’s Head of European portfolio management, Andrew Balls last month. This had the effect of knocking Sterling lower and although not new, will serve to re-emphasise the tightrope upon which the UK fiscal position is currently balancing.

The other big gainer on risk aversion positioning has been the Yen which has made steady gains this year against all-comers, even the resplendent Greenback. This can not possibly be maintained so expect a swift correction on any up-tick in risk appetite at all.

Other news over the weekend and for the early part of the morning has been fairly sparse but we have a seen further evidence of the long term recovery taking shape in Australia, on two fronts. Firstly, and more fiscally related, the Treasurer ‘down-under announced that the government was ending, with effect from the end March this year, its guarantee on Australian banks debt issuance. This will have more of an effect on the country’s 2nd tier banks’ ability to raise fresh capital than the BIG 4 banks, but should eventually be seen by the international community as a sign of progress being made in progressing economic repair. The 2nd positive announcement for the area was news of a agreement between Resourcehouse of Australia and China, for the former to supply coal to Chinese power stations over the next 20-years under a contract worth around AUD 70 billion in total.