Intraday Market Thoughts

Dexia Bailout Plan Lifts Euro Above 1.35

by Kyle Morrison
Oct 10, 2011 9:07

EURUSD jumps to 1.3540s on Dexia bailout sees debt crisis reach Europes core, French industrial better than expected. EUR 90bn in state guarantees will be given to finance the group.

Concerns that the European crisis has spread beyond Greece this week is likely to keep investors nervous with the troika still not confirming the release of the next tranche of funds. Fridays downgrade of Italy by Fitch wasnt too much of a surprise given that it was merely following in the S&P and Moodys footsteps, however the downgrade of Spain was, promptly knocking the stuffing out of the rather misplaced positive sentiment that had started to prevail at the end of last week.

The failure of Franco Belgian lender Dexia, one of the banks that passed this summers so-called stress tests has seen the French, Belgian and Luxembourg governments come to an accord to step in to save the beleaguered bank. The agreement by the banks board will see the beleaguered banks assets covered 60.5% by Belgium, 36.5% by France, and the rest by Luxembourg.

In doing so Moodys has stepped into the fray and put Belgiums credit rating on review for a downgrade, due to costs associated with the rescue. The fear is that Frances rating could well go the same way, which is why France wants to use the EFSF to help recapitalise European banks, a course of action Germany is opposed to given that the biggest burden will likely fall on them.

Yesterdays reiteration of a previous statement from Merkel and Sarkozy that they would ensure that all banks in Europe have sufficient capital, pledging they would have a solution by the G20 summit in November 3, merely serves up more delay and uncertainty.

The latest figures from Frances industrial and manufacturing sector for August are expected to show an economy continuing to struggle in the face of a slowing European economy, with French industrial production expected to slide 0.7%, while manufacturing production is expected to slip back from Julys 1.4%, to a positively anaemic 0.2% rise. With concerns about having to recapitalise banks at the forefront of markets thinking the last thing France needs is a slow down in two key sectors, especially with ratings agencies becoming trigger happy on downgrades.

In the wake of Fridays downgrade by Fitch Italian industrial production for August is expected to recover slightly, with a rise of 0.2%, from Julys 0.7% decline, but the year on year figure is still expected to slump further from a 1.6% decline to a 2.7% decline, thus reinforcing the concern cited by Fitch on Friday.

US stock market are open during Columbus Holiday, bond markets closed. Canada markets closed. China back from Holiday.


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