Doctors Diagnose ‘Stress’

Results released on Friday revealed that eight banks failed the European ‘stress tests’. The European Banking Authority, which carried out the tests also stated that another 16 banks were in the danger zone. Overall, five Spanish banks, one Austrian and two Greek banks failed. On Wednesday last week, one German bank pulled out of the tests effectively making it the ninth bank to fall foul. However, the tests did not take into account the impact of Greece defaulting, once again calling into the question the creditability of the tests themselves. Whilst the tests were more stringent than those carried out last year, ratings agency Standard and Poors still had its doubts.

Pound Sterling – UK Markets

The UK has almost been cast aside as our nearest counterparts have stolen the majority of headlines this past week. With our four major banks all passing the EU stress tests (some better than others) we have been given a clean bill of health. Actually, perhaps that was just a shot of paracetamol that now appears to be wearing off. Don’t be fooled by sterling’s gains against the euro. Our currency fell for the second consecutive day against the US Dollar as a report showed UK house prices declined in July for the first time this year.

US Dollar – US Markets

The US is still in crisis as the Democrats and Republicans remain at loggerheads over the cuts required to raise the debt ceiling. President Barack Obama feels that wealthier Americans should be taxed more whilst the Republicans are pushing for greater government spending costs. The lingering issue is that increasing taxes has the potential to stagnate investment and job growth. The conundrum threatens to stifle the global economic recovery and ratings agency Standard and Poor’s still has the US debt under review. In a dog-chases-tale situation consumer prices fell by 0.2 percent in June for the first time in a year as a sharp drop in energy costs offset other price rises. However, although consumer prices may have dipped, consumer confidence still remains worrying low according to a recent survey undertaken by Thomas Reuters/University of Michigan. Furthermore, annual inflation is at 3.6 percent and this would appear to be rising.

Euro – European Markets

Following the European stress test results the focus has swung back to Greece. The International Monetary Fund has stated that whilst Greece’s debts are sustainable, investors still fear a default. Other reports have gone as far as stating that it is not a case of ‘if’, but ‘when’ a default will occur. Greek Prime Minister George Papandreou passed several rounds of austerity measures including tax increases, pay cuts, privatisations and public sector job cuts to get aid from the IMF and the EU. All of which went down like a lead balloon (understandably) with the Greek public. However, it is now when the work really starts as it is time to implement these austerity measures. Following the stress tests the euro has backtracked against most of its major counterparts. The general view from investors is that the tests were not strict enough and the euro remains on a knife edge due to this, coupled with issues in Greece.

Other Currencies – Highlights

The worlds most highly regarded safe haven currency, the Swiss Franc may be on its way to euro parity if investors are to be believed. The Swiss National Bank has been rapidly selling the franc in order to stem the currencies recent gains, which threaten overseas sales. Currencies with higher yielding assets such as the Australian and New Zealand Dollar have fallen due to ongoing sentiment that European leaders will fail to agree on measures to resolve the debt crisis. Leaders are due to convene in Brussels this week to discuss the debt crisis.