Fears of Contagion on Potential Grexit See EUR/USD FX Spreads Plummet

Posted on | May 21, 2012 | No Comments

The Week in Review:

Eurozone peril and U.S manufacturing data were the catalysts last week as the market remained in reverse gear stumbling to its lowest level since the dip of last November.

Contagion is the buzzword as political problems heightened with Greece still unable to form a government with polls revealing voters are once again favouring the pro-bailout parties. Fitch lowered its rating of the country to junk.

These extensive problems caused the ECB to stop monetary operations to some Greek banks.

A bank run took place on Bankia with up to one billion euros being withdrawn, whilst foreign currency dealer ICAP stated that it is ready to start dealing in Drachma.

Greece’s demise and potential exit from the Eurozone, dubbed the ‘Grexit’, seems to be gathering more speed.

In forex spread betting, fears of contagion and one of the ‘bigger’ Eurozone states following them led the EUR/USD to plummet to the January low of 1.264 with Moody’s intensifying the fear by downgrading 16 Spanish banks.

Mervyn King outlined the UK’s growth prospects as unusually uncertain in his inflation report and stated that the Eurozone is tearing itself apart without any obvious solution.

In a nutshell, the BOE slashed growth forecasts from 1.2 percent to 0.8 percent and raised near-term inflation outlook with the situation slightly worse than had been forecast in its February report.

The FOMC also joined the downbeat crowd with their minutes reflecting wariness about the strength of the recovery.

US treasuries pushed forwards after details from the meeting revealed that more monetary support is ready should the economic recover falter.

Several members were said to acknowledge that more stimulus could be necessary with some seeing risk inflation pressures building.

Figures also did not make good reading with the Philly Fed manufacturing figure revealing a contraction rather than significant expansion over the past period.

However, there should not be overall alarm as the Empire State index, a similar gauge that measures manufacturing in the New York region, surged in May, according to figures released by the New York Fed earlier this week.

In shares spread betting, focus was on the Facebook IPO and the JP Morgan trading loss, the latter seemingly unravelling as they try to unwind the large position.

Facebook have raised $16 billion through the IPO with the initial market capitalisation of the company expected around the $100 billion mark when shares commenced trading on Friday.

This initial price puts the company above Disney and McDonalds in terms of market size. The jury is out to see how it will perform in the long run.

The scandal surrounding JP Morgan seems never ending with the initial $2 billion CDS loss now looking more like double that.

Heads are set to roll with Ina Drew, the head of the Investment Office the first casualty. More are likely to follow with most of the fingers being pointed at ‘The Whale’ and Jamie Dimon who encouraged such large positions to be undertaken.

The loss prompted the White House to call for tougher banking rules.

In the UK, Lonmin saw platinum sales flat in H1, Emed Mining reported an operating loss, G4S saw profits at a similar level to last year whilst ICAP saw an operating profit margin of 22 percent with electronic business up 4 percent.

Antofagasta reported earnings up 35 percent, Aviva reported trading in line with views whilst Investec saw operating profit down -17.4 percent.

The Spread Betting Markets – The Coming Week:

Inflation and Borrowing figures are out in the UK on Tuesday along with the BOE Inflation letter.

Wednesday sees the release of New Homes data from the US along with the IFO Business Climate from Germany.

Core Durable Goods order and Unemployment Claims are out Thursday from the US.

British Land, M&S, United Utilities and both Cable and Wireless constituents report.

Spread betting is a leveraged product. It carries a high level of risk to your capital and, as it is possible to lose more than your initial investment, it may not be suitable for all investors. Therefore, ensure you understand the risks involved and seek independent advice if necessary. The tax treatment of spread bets may be subject to change in the future.

Article by Spreadex

The above should not be construed in any circumstances as a recommendation or offer to sell or recommendation or solicitation of any offer to buy any security or other financial instrument.

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