Saturday, April 24, 2010

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The Greek story continues to rattle on causing the euro to slam to an 11 month low on a trade weighted basis and a 3 month low against the pound.

It started with Eurostat revising the level of Greek debt lower once again and ended yesterday with Moody’s, the ratings agency, downgrading Greek sovereign debt to A3 and not ruling out the potential for further. A3 is the last ‘investment grade’ rating a bond can have; anything less is classified as junk. Should Greek debt be moved into junk territory then they would no longer be able to be used as collateral against loans from the ECB meaning that Greece would have to rely on either a bailout or funding from the markets. The market may limit their options further as the yield on Greek debt surged to an eye-watering 9% yesterday.

So the money comes from the EU and IMF? Yes? No. Or at least not quickly. In Germany the opposition FDP party have rejected plans to fast track aid to Greece. Merkel and her finance minister had wanted the aid bill attached to an easier bill to pass the German government. Opposition parties have however asked for a separate bill to vote on. This hold up is important as Germany’s contribution to the bailout is EUR8.4bn or 28% of the total EU package. This is all getting very messy.

Needless to say the markets jumped on this news like a pack of wolves and savaged the single currency. Sterling in overnight trade broke the 1.16 level before falling back and EUR/USD looks set for a piece of the 1.31s. Anybody who is long euro at the moment is in a whole world of trouble.

Sterling was hardly affected by the Leaders Debate last night and opinion polls show that some of the luster may have fallen from Nick Clegg in the past week and David Cameron and Gordon Brown have reorganized their tactics to deal with this new challenge. All in all the opinion polls are unchanged and fears over a hung parliament remain. Interestingly enough Goldman Sachs released a note to their clients yesterday telling them to buy sterling and ignore the possibility of a hung parliament.

One thing we cannot ignore is today’s UK GDP figure. This is the preliminary estimate for the 1st quarter and where it will come out is anybody’s guess. We think that we may see a fairly downbeat number in and around 0.2%, the market consensus is at 0.4%. The release is due at 09.30. We also have US durable goods orders at 14.00

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