Markets rise on growing optimism

Financial markets around the world have posted solid gains overnight on growing optimism that Greece will be given more time to meet its deficit reduction targets and that the US Federal Reserve will extend their current accommodative monetary stance.

The group of 20 industrial countries leaders, who are meeting in Los Cabos Mexico, are expected to issue a joint communique at the end of their meeting in the next few hours that will include in their statement, that European members of the G-20 “will take all necessary policy measures to safeguard the integrity and stability of the area, improve financial markets and break the feedback loop between sovereigns and banks.” This supports the idea of some sort of Euro-wide bank deposit guarantee, that will not be tied to each countries own Government. This would negate the need for people to take money out of Greek banks and re-deposit it in German banks as an example.

This news has seen the Euro recover to Monday’s post Greek election levels of 1.2700 vs. the USD and also seen stockmarkets and currencies rise around the world. The NZD has pushed up close to the .8000 level vs. the USD, but slip back slightly vs. the Euro and Pound.

In the US, optimism is high that the Fed will extend their Operation Twist program, which has seen them sell shorter dated investments and buy longer dated instead. This has helped drive mortgage rates down and is supporting a mild recovery in the housing market. One of the Fed’s concerns, is that only people with very good credit ratings (called credit scores in the US) can get the super low mortgage rates on offer. They may not announce a plan to address this tomorrow, but it is high on their list of priorities. Any progress in this area would further bolster the recovery in the housing market which would be a big boost for the US.

Today in NZ, we get an update on the Current Account for the first quarter. The Current Account is like NZ’s overdraft with the world and is invariably negative as we have to keep paying the interest on the overseas debt that the banks raised to lend to the housing market during the boom years. The good news is that the interest bill should be getting smaller as interest rates fall around the world. The bad news is we have about NZD 100 billion to repay and it will be a long slow process. It is worth Noting that the current rise in house prices, is driven mainly by demand outstripping supply and not by more foreign borrowing by the banks.

A sharp rebound in equities has helped push the Kiwi higher