Concerns in the Eurozone were once again the order of the day for equity and currency markets throughout yesterday, and have continued as such early today. The euro came under renewed attack on Monday as concerns over Europe’s fiscal problems intensified after Spain’s central bank took control of a savings bank. CajaSur, a 146-year-old lender owned by the Catholic Church, was taken over by the Bank of Spain in the latest move by the central bank to restructure the country’s troubled mutually owned banks, or “cajas”. The message was that the central bank would be unwilling to tolerate further delays to the mergers and cost-cutting exercises among the unlisted cajas de ahorros that it believes are essential for the health of the country’s lenders and the broader economy. A reform of the cajas , which account for about half the Spanish financial system’s assets and often fall under the influence of regional politicians, has been discussed since the collapse of the housing bubble in 2007. Where markets thought they had seen the last of the bank bailouts well over a year ago, the culmination of recent events in the Eurozone has reignited fears of a double-dip recesion. Unsurprisingly, the Euro has again suffered, now at 1.2225 against the Dollar, having regained ground back up to 1.2550 by the end of last week. This has had a dual effect on Sterling’s main currency pairs. GBP/EUR is now back up 1.1680, over two cents higher than at the end of the last week, however the jittery markets have again turned to the Dollar for respite, sending GBP/USD down to below 1.4300.
Perhaps it’s good for Sterling that the Euro’s woes has taken the markets attention away from it. Figures released have shown that speculators have increased their bets against Sterling to record levels after the election. Positioning data from the Chicago Mercantile Exchange, showed that speculators had extended their bets against sterling in the week ending May 18. This was the fourth consecutive week that speculators increased their short positions in sterling, taking the ratio of short to long positions to nine to one. Although activity on the CME represents a fraction of the daily turnover on the world’s currency markets, the positioning data are widely regarded as a proxy for hedge fund activity. Chancellor Osbourne’s plans to cut public spending by £6.25bn had failed to give the pound traction on fears that the spending cuts could undermine UK growth.
This morning’s release of revised Q1 GDP data has not thrown in any surprises. Other data for the day include US consumer confidence for May, though issues in Europe look set to dominate. The Aussie Dollar was hit hard overnight. As a currency strongly correlated with global growth prospects, a newly nervous market would seem to be taking profits on the strong gains seen earlier in the year.