King warns of an increasing threat to the UK economy

This morning, the German Chancellor, Angela Merkel , reiterated her opposition to the issuance of Euro bonds and any larger role for the European Central Bank (ECB) in solving the sovereign debt crisis. In her speech to the German Parliament she underlined the need for tighter Eurozone fiscal integration and a need for a change in existing treaties. At home, in its second-half financial stability report, The Bank of England has warned that the Eurozone debt crisis and the banking sector credit squeeze, pose an increasing threat to Britain’s financial stability. The Spanish and French government debt auction yesterday met with a good response, with materially lower yields at the French bond auction.. France received strong demand for €4.3 billion of debt auctioned, with yields on its 10-year and 15-year notes falling. Spain sold €3.75 billion of government bonds, meeting its target, albeit at higher yields. However, a decline in manufacturing activity for the region limited the euphoria. In its second-half financial stability report, The Bank of England has warned that the Eurozone debt crisis and the banking sector credit squeeze, pose an increasing threat to Britain’s financial stability.

Pound Sterling – UK Markets

Sterling is trading lower after the Bank of England's (BoE) Financial Policy Committee (FPC) raised concerns over the British banking system, urging banks to "give serious consideration to raising external capital in the coming months." The Eurozone crisis continues to weigh on Sterling with the BoE Governor, Sir Mervyn King, painting a grim picture of the UK banking system. The Governor stated that "it is desirable to raise capital buffers further in order to improve resilience in light of the continuing threats to UK financial stability". He indicated that the Government, along with Financial Services Authority and the BoE, are making contingency plans in case of a second credit crunch. Data slated for release later today, is expected to indicate a drop in the UK construction Purchasing Managers’ Index for November.

US Dollar – US Markets

Optimism, driven by easing concerns about the Eurozone debt crisis and steadily improving US economic data, has dampened the appeal for the US Dollar as a safe haven asset. According to the President of the Federal Reserve Bank of St. Louis, James Bullard, economic reports signaling stronger U.S. economic growth, should deter the policy makers from being in a rush to introduce further quantitative easing. Taking centre stage today is the US non-farm payrolls, which is expected to indicate an improvement in the job growth rate and is likely to dampen expectations of the central bank implementing another large-scale asset purchase program. The currency is expected to trade weaker against the Euro amid hopes of positive developments in the Eurozone.

Euro – European Markets

The recent Euro rally is largely due to the relatively successful Spanish and French debt auctions yesterday. Allaying investor concerns, the ECB President, Mario Draghi, announced that the central bank were prepared to take firmer measures to alleviate the EU debt crisis and called for an agreement on greater fiscal integration in the area. Meanwhile, France’s President ,Nicolas Sarkozy, indicated that Eurozone nations needed closer and stricter coordination of national budgets to survive. However, the German Chancellor has repeatedly rejected calls for an expanded role for the regions’ central bank. The currency is expected to find support from cues on the Franco-German role in the resolution of the region’s debt crisis.

Other Currencies – Highlights

The Japanese Yen is trading lower amid concerns that the Japanese Government would intervene in the currency markets to stem the rise in the Yen. Japanese Finance Minister, Jun Azumi, re-iterated that he would not hesitate to take action if speculative moves drove the Yen higher. He added that Japanese banks are not facing dollar liquidity shortage. Meanwhile, Japanese companies slashed their total investment in plant and equipment for the second consecutive quarter, owing to a strong Yen and a slowing global economy. The Japanese monetary base surged 19.5% annually to ¥118.497 trillion in November. We expect the Japanese Yen to trade weaker against the Euro and Sterling amidst growing optimism that Eurozone leaders would work towards finding a solution to tackle the region’s debt crisis.