A triumph of hope for the euro

Publication date: 6 August 2012
Author: Mark Deans, Moneycorp

A banker, like an attorney, a used-car salesman or any other revered professional, is allowed by law to do many things. The banker may, for example, legitimately charge 20.5% interest on credit card debt when the Bank Rate is 0.5%. But legitimacy and acceptability are not the same thing, as certain bank CEOs have discovered in the last few years. Take Theodore Pantalakis, for example. Over a period of months the recently-retired boss of Greece’s ATEbank moved €8m of his family’s money from Greece to Britain. The legality of the transfer is not in question but the signal it sends to his countrymen is, at best, unhelpful.

It is, however, a symptom of what Italian Prime Minister Mario Monti describes as the “psychological breakup” of Europe. He told Germany’s Der Spiegel magazine that the eurozone crisis is creating national resentments that could damage the EU. Sig. Monti’s comment came days after he warned that without help to lower its borrowing costs, Italy could find itself with an anti-euro government.

The battle of rhetoric across the Channel is heating up, not least in the tactical duel between Spain and the European Central Bank. The ECB says it will provide unlimited support for Spanish government bonds only if Spain makes a formal request for bailout aid. Spain says it will consider making that formal request only if the ECB is supporting its bonds.

For the moment though, this brinkmanship is not unsettling investors. On Friday they were obviously looking on the bright side, optimistic that September would bring the Club Med debt crisis to a tidy conclusion when all the leaders returned, refreshed, from their summer holidays. The euro was the day’s gold medallist, adding two cents against the US Dollar and two Japanese yen. Sterling lost a cent and a quarter to the euro but strengthened by one US cent and one yen. It is firmer against the Canadian dollar, weaker against the Aussie and unchanged against the New Zealand dollar.

The services sector purchasing managers’ index-fest awarded better-than-expected marks to Euroland and the States. The UK reading fell fractionally short of target at 51.0 but was still better than the euro area figures. Another positive surprise came from the US employment report. Non-farm payrolls rose by 163k in July, many more than the forecast 100k. Investors reacted by buying the dollar against the yen and selling it against the euro, the pound and the commodity currencies. The logic this time equated jobs growth in America with the euro’s imminent salvation to equal global economic joy and a shift from safety-first to profit.

Today will be a disappointing one for ecostat junkies. Japan’s leading index, which aims to show which way the economy is pointing, was three points lower at 92.6 but broadly in line with its readings over the last two years. All that remains is the Sentix index of eurozone investor confidence, which might be fractionally better than last month’s three-year low.