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The good news is that Greek politics might now drop out of the limelight as a cross-party coalition Government is being formed in order to ensure payment of the latest tranche of EU/IMF aid. The bad news is that it is being rapidly replaced centre-stage by Italian politics, with Prime Minister Silvio Berlusconi very likely to lose a no confidence motion at some point this week, possibly as early as Tuesday evening.
The yield on Italian 10 year Government bonds has this morning hit a post-EMU record of 6.58% with the spread against German bonds widening to a high of 479bp. Spanish and French Government bond spreads have also widened but it is the Italian situation which will receive most Press comment and investor attention. It is widely assumed that 7% is a critical point of no return for sovereign bond yields. Just 42 basis points is a very narrow margin of comfort.
Equity markets in Asia have traded marginally lower but European bourses are set for more significant losses on the day. Spanish and Italian stocks are under most pressure but it is worth noting that the DAX in Germany is already more than 400 points below its post-EU Summit high of 6364 whilst the FTSE has given back 250 points in less than 10 days.
There is little economic data scheduled anywhere over the next few days. The first week of the month is generally dominated by US non-farm payrolls, the third week by inflation data and the fourth by global purchasing manager surveys. This second week is quiet but does risk exaggerated market reaction to the numbers which are scheduled for release.
In this regard, the German industrial production data released today at 11.00GMT will be closely watched. Consensus expectations are for a – 0.9% decline after a 1.0% drop in August but with a very disappointing set of German factor orders numbers last week, the risk is probably on the downside. We have previously described German economic growth as the glue which holds the Monetary Union together. If growth falters significantly, that glue becomes much less sticky and will further pressure peripheral sovereign bond spreads.
European politics have pushed EUR/GBP today to the bottom of a 0.8550-0.8850 trading range. UK importers might well think about using this bout of GBP strength to hedge some of their forward currency exposure as thoughts turn to another possible expansion of QE from the BoE on Thursday.
What does this all mean for me? Well buying your EUR, USD, AUD or any other currency at the wrong time could cost you a fortune. There is no crystal ball but Currency UK can give you the information you need to make an informed decision.