Another weekend, another financial bail out, however this time it was not the US that was struggling, but Europe. The German government are involved in a potential €50bn bail out of Hypo Real Estate, and have also moved over the weekend to follow Ireland in guaranteeing all private deposits, something which is seen as distorting competition within the EU, although if the EU leaders, who met over the weekend, had agreed such a pact then there would be less problems, instead it seems each country is arriving at the same position individually with Gordon Brown now under pressure to give the same guarantee. There was also news of another bank buy out with Fortis being swallowed up by BNP Paribas.
The problems in the European banking sector, when coupled with the dovish tone struck by Trichet in last weeks rate decision, have led the Euro to weaken significantly, allowing Sterling to break above it's tight range and almost hit 1.30 overnight, before easing back in early trading this morning. The Euro has also dropped against the Dollar falling below 1.35, has banking stocks across Europe take a battering.
In contrast to the European woes, the drawn out passage of the TARP bill through the US congress finally ended late Friday, giving the US Dollar a boost, allowing it to push Sterling down to almost 1.75 before easing back on the opening of London trading. The Dollar has risen also as a consequence of the problems elsewhere in the world as banks liquidate positions and prefer to hold Dollars, the historical reserve currency. As the problems, started by the US, ripple out across the financial sectors Globally, even the smaller countries are suffering with the Korean and Icelandic systems under pressure, forcing central banks to take action.
So far the UK Government have been reacting to the banking crisis on a case by case basis; they are now under pressure to take a more systematic approach, and something could be announced this week. On Thursday we have the BoE announcement, with a rate cut on the cards, and if as some expect the rate cut is more than 25bp, and there are signs in the accompanying statement of more on the cards, then we could see Sterling weaken. There is no data today, so instead traders will be watching the fallout of the latest banking crisis in the stock markets.
Michael Corcoran | Treasury Solutions | nabCapital