Uncertainty hinders euro performance

DISAPPOINTING US retail sales figures announced yesterday lunchtime failed to produce the increased yields on US Treasuries anticipated by traders, with the news allowing the euro to reach an early afternoon high of $1.3551. Combined with strong euro demand from Asia and the Middle East, the common currency stabilised itself against the dollar, rising 0.14 per cent over the day. However, it is not expected that the currency will gain any real traction against a background of uncertainty surrounding the future of Germany’s largest lending bank and with Portuguese bond yields staying above the 7 per cent mark.

Eleventh-hour discussions will continue today regarding the restructuring of Germany’s WestLB bank. The plans must be presented today in order to meet European Commission deadlines which were put in place as a condition for EU approval of state aid granted in the financial crisis. The last-ditch talks follow a failure of the German steering committee to reach an agreement on the future of the lender during discussions on Sunday. This was the first time that the financial watchdog BaFin was present and it was rumoured that it was opposition put up by German savings banks that was the main roadblock to an agreement on a rescue.

The prospect of a break-up of the part state-owned bank with €220bn worth of assets will likely take the wind out of the sails of any positive news that may come from Spain as a result of tomorrow’s bond auction. Spain will hope to replicate Italy’s strong sale of government bonds, where they sold close to the maximum intended amount of 5 and 30 year government bonds earlier in the week. Italy’s sale of a total of €5.1bn worth of bonds suggests a return of investors’ confidence in Italy and southern Europe. This is tempered by news that Portuguese 10 year bond yields are at 7.37 per cent, while short of the 7.64 per cent reached last week, will continue to sound alarm bells for many.

According to Angus Campbell, head of sales at London Capital Group, the sovereign debt crisis is still the single biggest issue for Europe, with Eurozone peripheral debt concerning investors. He adds that people are looking to the European Central Bank to provide stability to the debt-riddled Eurozone. “Markets are looking for evidence that the bailout fund will step in,” he says, “with Portuguese bond yields still way above 7 per cent, the consensus seems to be that Portugal will be the next country to seek a rescue package.” In short, it is likely that any meaningful gains will be sand-bagged by uncertainty over Europe’s continuing debt plight and the role that the European bailout fund will take in the coming months.