So much is the worry surrounding the Eurozone at the moment that Spanish Prime Minister Jose Luis Zapatero has even had to cancel his holiday! Hopefully, my facetious tone would have come across. At a time when the continent has squabbled through one of the most serious default threats, I think Mr. Zapatero can just about manage a couple more weeks at work before he suns it up. An overall threat to the Spanish economy continues, as dwindling unemployment, low growth and investors pulling their funds in the fear that long term, we may have a problem. Whilst the foreign exchange markets have reacted sleepily to this, it is very apparent from an overall market perspective that there is a growing level of anxiousness surrounding the future of the euro’s peripheral nations.
Pound Sterling – UK Markets
Like a quiet trip down a river, the British economy isn’t moving very fast, but at least it’s a sunny day. We can count ourselves lucky that some investors are even saying that we are at present one of very few safe havens. However, looking further down that river, reports of class 6 rapids are our potential downfall. I am indeed referring to the risks that are the US and the Eurozone. With the UK banking system holding £111 billion worth of loans in the three most ‘troubled’ Eurozone economies (Greece, Ireland and Portugal) the International Monetary Fund has been quick to announce its long term concerns over our recovery.
US Dollar – US Markets
Asian stock markets have reacted abruptly to the recent debt ceiling increase in the US. Unfortunately, not in a good way. Shares across the Asian markets have fallen; tracking those in the US as it is evident the economy is struggling to recover. Medium to long term investors fear this will continue as public spending cuts are likely to affect growth which at present, is non-existent. The Tea Party, like a spoilt child eventually got their way. This forced President Barack Obama to come out fighting by clearly identifying the issues surrounding austerity measures that revolve solely around spending cuts.
However, China who currently tops the table with its level of reserve asset investment in the US welcomed the deal that raised the debt ceiling (for obvious reasons). They too have announced that they recognise the long term risks and have stated that they will continue to diversify its reserve assets to minimize the negative impact associated with long term uncertainty. It appears that the US economy, along with its currency, faces an uphill battle if it is to hold its ground.
Euro – European Markets
Societe Generale, France’s second largest bank has recorded whopping reductions in second quarter profits due to its exposure to Greek debt. Data showed reductions of 31 percent from the same time last year. This news only cements our long term views that the Eurozone faces the challenging, if not impossible task of restoring investor confidence in the continent. It now appears that it is not only the peripheral nations that are at risk to potential debt contagion.
Ongoing issues in the US are also affecting Europe, with German stocks falling 11 percent from this year’s high. This news was caused by fears that the US may lose its top credit rating. Rating’s agency Moody’s announced that after avoiding a default the outlook for the US debt grade is negative. This has consequently thrown a few more spanners into the works.
Other Currencies – Highlights
The Swiss Franc has continued its climb to the top, strengthening to its highest level versus the euro and US Dollar. The currency appreciated as much as 0.3 percent against the euro and looks set to continue current trends.
The debt crisis in the US has also hit Japan. Stocks in the recovering nation fell by the most since the March quake as demand for Japanese goods diminished. To give you an idea of the losses, Honda, which gets more than 40 percent of sales from the US lost 3.2 percent on its share value.
Dollar Weakens as Fed Rate Cut in July Seems Imminent