Newsletter Issue 26 July 2010

Economic Overview

Key notes from Last Week

The Eurozone bank stress test results released on Friday after the European equity markets closed were one of the key events of the week. There continues to be debate if the tests were tough enough.

• 84 of the 91 European banks passed the stress tests with the 4 top French banks and all but one German bank were judged to have sufficient capital cushions to survive potential losses on their sovereign debt holdings. Seven banks from Greece and Spain failed the tests for an overall capital shortfall of $3.5bio Euros.
• Central bank news this week was almost universally on the cautious side -- even from central banks that have started tightening monetary policy -- the Reserve Bank of Australia and Bank of Canada. The RBA said that future rate increases would be dependent on inflation data. The Bank of Canada hiked its policy rate by 25bp to 0.75% this week but at the same time lowered its economic outlook and had a dovish policy statement.
• The flash Eurozone manufacturing and services PMIs were up rather than down. The German IFO posted it largest monthly gain ever to the highest level in 3 years against an expected decline. The preliminary UK Q2 GDP was up almost double the expectations at 1.1% qoq against +0.6% in Q1 and +0.3% in Q4. These were in contrast to a 5% drop in US housing starts and existing home sales, a 37K increase in weekly jobless claims

Regional Markets

According to the debt restructuring plan outlined to bankers on Thursday, Dubai World warned that lenders aside from the government’s own support fund, would face a significantly worse deal, it its debt plan fails and it is forced to seek liquidation. According to Reuters, the repayment of an initial $4.4bio, five-year debt tranch would be financed by its Istithmar World Portfolio and its Infinity Investment – two segments that were ring-fenced from the conglomerate’s debt proposal agreed by a core group of bankers in May.

Dubai Financial Market (DFM) posted a second quarter net profit of AED25.9bio, down 79.8% from a year earlier, according to a statement on the DFM website.

Forex

EUR:  

1. The Euro edged up against the USD on Friday after most Eurozone banks passed stress tests, though analysts worried the checks weren’t strict enough to reveal the true health of the sector.
2. Fear of a Eurozone debt crisis and its impact on European banks drove the Euro below 1.19 levels last month – lowest since 2006 – but it began a swift recovery in July and hit a 10-week high recently.
3. This is driven by data showing Eurozone recovery has been holding up better than anticipated, even as governments tighten their bets to reign in large deficits.

GBP:  

1. Sterling rose sharply on Friday, boosted by unexpectedly strong UK economic growth numbers which left it on course for its biggest one-day percentage gain against the euro in more than seven weeks.
2. Data showed GDP jumped 1.1% qoq – the strongest growth in four years and almost twice as fast as forecasts for 0.6%. This suggests that the situation with the UK economy is not as bad and there is optimism going in the second half.
3. The strong UK GDP data triggered bets that the BoE could start raising interest rates sooner than previously thought, causing UK interest rates to plunge.

JPY:  

1. A senior Japanese government official had stated yen’s current levels seem to be too high and that the government will watch how the currency levels affect pick-up in business activity.
2. The USD erased losses against the yen, after data showed US existing home sales fell less sharply than expected in June.

Derivatives
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 ECONOMIC INDICATORS (26-Jul-2010/30-Jul-2010)