North Korean Nuclear Test Shakes Sleepy Financial Markets

Read all about it:
Report: Pyongyang also test-fires short-range missile…
South Korea military forms crisis team…
Japan says test ‘unacceptable’…
U.S. ‘gravely concerned’…
Britain:‘Breach’ of UN resolutions…

The Euro climbs back above $1.40 for the first time since January 1st
At the end of last week, government bonds had a very difficult time. In the euro zone and the US, 10- and 30-year yields are now at their highest level since last November. The increase in yields is mainly driven by a rise in inflation expectations, which put some doubts on the effectiveness of the central bank’s quantitative easing policies to keep longer-term yields at low levels, plus of course, the massive increase in supply which is causing indigestion.

The US dollar is the main victim of the last few days. The greenback was already on the defensive early last week and traded slightly below key support levels, but the real break occurred in the second halve of the week. On Thursday, S&P revised the outlook of the UK rating to negative from stable suggesting that the UK might at some point lose its AAA rating. The stellar deficit and the rapidly rising debt were the obvious reason behind the decision, which was maybe unexpected, but nevertheless long overdue. The situation of the UK government finances doesn’t merit such a AAA rating.

However, the markets immediately deducted that the US government finances are no better, and thus concluded that the country’s AAA rating is at risk too. Bond yields rose sharply and as especially the US is dependent on Asian demand for its Treasuries, the event was highly negative for the US dollar (more than Sterling). Markets are afraid that a vicious circle may be building in which higher yields are pressuring the Fed in raising the amount of Treasuries it buys in the framework of its QE. Such an eventual expansion of Fed purchases of Treasuries would ever more resemble to direct government financing and lessen the Fed’s zeal to keep inflation in check.

Inflation has always been considered as one possibility to lower the (real) burden of debt. Needless to say, such an eventual scenario spooks dollar investors and thus perfectly explains why the dollar has such a difficult time. It’s a given that a strong euro will hinder any export driven growth recovery that Europe may have hoped for.

Bank’s Back In Focus
Nationalized Anglo Irish Bank is expected to announce impaired loan loss of between €3.5 billion and €4 billion when it releases results this week, according to the Sunday Times. Of a total loan book of €74 billion, of which €12 billion is property development, the losses are expected to push the bank into a €2.5 billion capital requirement according to the paper. Of key focus will be the movement in Anglo Irish Bank’s deposit base, which stood at €51 billion at the last set of results.

Today is the final deadline for the banks to fully disclose property and development exposure, with the aim of providing an up to date picture of the loan books. The intention is to transfer the most troubled portion of the loan books once NAMA legislation is enacted.

Elsewhere, NAMA-related newsflow is likely to continue to dominate. Today marks the deadline for banks to provide a detailed analysis of their development loan portfolios to officials working on the project, while media reports suggest that the government is prepared to recall the Dail over its summer recess if necessary to ensure that the NAMA legislation is enacted.

Very quiet on the equity front this AM with both NY and London out. Just a few snippets. A bullish Barclays are beefing up their M&A business and hiring / poaching up to 65 new bankers. Petro China has overtaken Exxon as the world’s largest company by market capitalization. In auto news Porsche if off 6% after a media report that VW had to extend a euro 700m line of credit to support them, while Renault has cut the sales target for its new Scenic model quite dramatically.

Eurozone: The Week Ahead
Surveys already released, such as the German ZEW, point to a relatively large increase in the headline key IFO index today. While confidence indicators have been doing better of late, it is important to remember they are still quite some way from pointing to positive growth.

The detail of the German Q1 GDP data should show an exceptional collapse in exports and investment. The terrible German GDP readings from Q4 and Q1 should also now start to have a greater impact on the unemployment figures. The flash HICP release should reveal that inflation fell to a new all time low of 0.1% y/y in May. More important will be what happens to core inflation after it’s jump upwards in April. We expect it to fall, preserving the mild downwards trend in underlying inflation.

And Finally…

The very visible hand. Scary

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So you thought that the housing marketwas bottoming out?

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.