If a lack of sleep over the weekend had you looking in the mirror at some heavy bags under the eyes then spare a thought for US leaders. I thought, rather than break the news up yesterday and today, I would summarize two days that were of crucial importance to the ongoing survival of the US economy. A month of bickering and disagreement has finally come to an end with US President Barack Obama yielding to the Republicans in a deal that will see public spending cuts. Obama had initially called for taxes on richer Americans to be increased, but unfortunately, given the time restraints he was unable to sway the Republicans.
However, last night saw the US House of Representatives vote 269 votes to 161 in favor of the bill and is now expected to be approved by the Senate and signed into law by Obama later today. A US default would have been the first in its history, but the increase sees the debt limit increased by up to $2.4 trillion in return for savings of at least $2.1 trillion in 10 years. And finally, an interesting fact to summarize the state of the US economy: Electronics giants Apple officially have more disposable cash than the US government…
Pound Sterling – UK Markets
Sterling never fails to make us wonder. With the US set to pass a bill that will raise their debt ceiling, the UK, once again lays dormant in the middle. Furthermore, whilst both US and UK manufacturing data was down yesterday, UK manufacturing fell below the benchmark figure of 50. Over the Atlantic, US manufacturing was down, but still remained above that ‘bullish’ level. So, what does all this mean? It means that sterling unfortunately is continuing to fall against the ever resilient US Dollar. The news indicates that UK growth is slowing and if it continues to do so the IMF has indicated that UK may need to boost stimulus.
However, if you are a euro buyer you will be glad to know that it has been revealed that growth is slowing in the Eurozone. This has given way to some euro weakening. Although don’t expect to switch on your computer and find a 1.20 market. In fact, the gains, which were minor to begin with, have already started to retrace. Same old, same old…
US Dollar – US Markets
Whilst avoiding default was the US government’s single and most important aim, investors are not overly confident on the future. In fact, top investors boosted bearish (negative) bets to the highest level in more than two months on the dollar as they believe increasing the debt ceiling will erode the value of the greenback. Immediate dollar strengthening may have been seen, but don’t be surprised to see it begin to retrace those gains. There remains a huge amount of debate as to whether the spending cuts proposed in the US were the correct ones, or if it was simply a case of the President having no other alternative. We shall see if they are a sensible and realistic going forward.
Euro – European Markets
Merrill Lynch Global Wealth Management has become the latest organisation to express its concerns over the most recent Greek bailout. The global organisation has refused to place any of its $1.5 trillion worth of assets into Italian or Spanish bonds. The bailout itself was struck to create confidence in the markets, but it appears global investors are not being fooled by this latest party trick. This all adds to further indications that it may only be a matter of time before Greece defaults.
Other Currencies – Highlights
The Australian Dollar came to a grinding halt and put its gearbox into reverse as the Reserve Bank decided to hold interest rates. There had been speculation that interest rates would be increased.
It’s Kiwi partners however have revealed that wage gains had accelerated in the second quarter, adding to signs of inflationary pressure. This may require the central bank to raise its interest rates this year from a record low.
Dollar Weakens as Fed Turns Dovish, Eyes on BoE
Euro Plummets as Draghi Opens Door For Rate Cuts
British Pound Stays Under Pressure Ahead of Tuesday's Vote