* Euro retreats after Spanish rating downgrade
* Weak Italian, German economic data adds to gloom
* Lack of policy action from Fed hits riskier currencies
* Spain expected to request aid package at weekend: sources
NEW YORK, June 8 (Reuters) - The euro slid on Friday after a three-notch downgrade to Spain's credit rating and signs of economic weakness in Italy and Germany, leaving it vulnerable as concerns increase that the euro zone debt crisis is getting worse.
European Union and German sources told Reuters Spain was expected to make a request over the weekend for an aid package to prop up its troubled banks, highlighting the vulnerability of the country's financial sector.
Rating agency Fitch slashed Spain's credit rating on Thursday, leaving it just two notches short of junk status. It signaled further downgrades could come as the country tries to restructure its troubled banking system.
"There has been little to soothe uncertainty and central bank action this week failed to remove tail risk," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto. "News flow remains relatively negative."
The euro fell 0.8 percent to a low of $1.2462, retreating from a two-week high of $1.2625 hit on Thursday after a surprise interest rate cut by the Chinese central bank.
More losses would leave the euro vulnerable to a test of the 23-month low of $1.2286 hit on June 1, using Reuters data, after failing to break above chart resistance at $1.2623, the January low.
The euro also took a knock after Italian industrial production fell far more than expected in April and German imports tumbled at their fastest rate in two years, adding to euro zone recession concerns.
The euro briefly came off its lows after China said it would cut fuel prices by nearly 6 percent from Saturday, which some traders saw as another positive step that may help stimulate China's economy.
But some analysts were concerned that by cutting rates on Thursday China might have been looking to pre-empt grim news from Chinese data due out over the weekend.
"The news with the easing measures in China would normally be positive for risk assets but the market is cautious," said Ian Stannard, currency strategist at Morgan Stanley in London.
"Below $1.2290 would leave $1.20/$1.19 in view, but the euro could get some positive surprises on the way that could lead it back up to the $1.26/$1.27 area."
EURO WORRIES
Many analysts said the euro could come under further pressure next week as attention refocuses on political turmoil in Greece before an election on June 17. A victory for anti-bailout parties would raise the possibility of Greece leaving the currency union.
The euro fell 1.1 percent against the yen to 98.93 yen. The safe-haven Japanese currency gained broadly as market sentiment declined, with the dollar losing 0.3 percent to 79.37 yen.
Currencies with more perceived risk were also under pressure after U.S. Federal Reserve Chairman Ben Bernanke offered no hints of imminent monetary stimulus in his testimony to Congress on Thursday, wrongfooting some market players who had positioned for a dovish statement.
"The recovery (in the euro) we saw in the last few days was not a sustainable one," said Lutz Karpowitz, currency strategist at Commerzbank, who forecast the euro would be around $1.20 by the end of June.
The higher-yielding Australian dollar slipped 0.5 percent against the U.S. currency to US$0.9850.
Thomson Reuters released its monthly foreign exchange trading volumes for May 2012 on Friday. May average daily volume was $154 billion up from $130 billion in April but down from the $161 billion reported in May, 2011.
FOREX-Euro slides as euro zone risks escalate - Reuters UK
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Forex: USD/CAD steady after Canadian jobs data - FXStreet.com
Why Money Market Funds Break The Buck - Yahoo Finance
Money market funds are often thought of as cash and a safe place to park money that isn't invested elsewhere. Investing in a money market fund is a low-risk, low-return investment in a pool of very secure, very liquid, short-term debt instruments. In fact, many brokerage accounts sweep cash into money market funds as a default holding investment until the funds can be invested elsewhere.
SEE: Money Market
Money market funds seek stability and security with the goal of never losing money and keeping net asset value (NAV) at $1. This one-buck NAV baseline gives rise to the phrase "break the buck," meaning that if the value falls below the $1 NAV level, some of the original investment is gone and investors will lose money.
This only happens very rarely, but because money market funds are not FDIC-insured, they can lose money. Find out how this happens and what you can do to keep your "risk-free" assets truly risk free
Insecurity in the Market
Even though investors are typically aware that money market funds are not as safe as a savings account in a bank, they treat them as such because, as their track record shows, they are very close. But given the rocky market events of 2008, many did wonder if their money market funds would break the buck.
In the history of the money market, dating back to 1971, there was only one fund that broke the buck until the 2008 financial crisis. In 1994, a small money market fund that invested in adjustable-rate securities got caught when interest rates increased and paid out only 96 cents for every dollar invested. But as this was an institutional fund, no individual investor lost money, and 37 years passed without a single individual investor losing a cent.
In 2008 however, the day after Lehman Brothers Holdings Inc. filed for bankruptcy, one money market fund fell to 97 cents after writing off the debt it owned that was issued by Lehman. This created the potential for a bank run in money markets as there was fear that more funds would break the buck.
Shortly thereafter, another fund announced that it was liquidating due to redemptions, but the next day the United States Treasury announced a program to insure the holdings of publicly offered money market funds so that should a covered fund break the buck, investors would be protected to $1 NAV.
Track Record of Safety
There are three main reasons that money market funds have a safe track record.
- The maturity of the debt in the portfolio is short-term (397 days or less), with a weighted average portfolio maturity of 90 days or less. This allows portfolio managers to quickly adjust to a changing interest rate environment, thereby reducing risk.
- The credit quality of the debt is limited to the highest credit quality, typically 'AAA' rated debt. Money market funds can't invest more than 5% with any one issuer, except the government, so they diversify the risk that a credit downgrade will impact the overall fund.
- The participants in the market are large professional institutions that have their reputations riding on the ability to keep NAV above $1. With only the very rare case of a fund breaking the buck, no firm wants to be singled out for this type of loss. If this were to happen, it would be devastating to the overall firm and shake the confidence of all its investors, even the ones that weren't impacted. Firms will do just about anything to avoid breaking the buck, and that adds to the safety for investors.
Although the risks are generally very low, events can put pressure on a money market fund. For example, there can be sudden shifts in interest rates, major credit quality downgrades for multiple firms and/or increased redemptions that weren't anticipated. Another potential issue could occur if the fed funds rate drops below the expense ratio of the fund, which may produce a loss to the fund's investors.
To reduce the risks and better protect themselves, investors should consider the following:
- Review what the fund is holding. If you don't understand what you are getting into, then look for another fund.
- Keep in mind that return is tied to risk - the highest return will typically be the most risky. One way to increase return without increasing risk is to look for funds with lower fees. The lower fee will allow for a potentially higher return without additional risk.
- Major firms are typically better funded and will be able to withstand short-term volatility better than smaller firms. In some cases, fund companies will cover losses in a fund to make sure that it doesn't break the buck. All things being equal, larger is safer.
Money market funds are sometimes called "money funds" or "money market mutual funds," but should not be confused with the similar sounding money market deposit accounts offered by banks in the U.S.
The major difference is that money market funds are assets held by a brokerage, or possibly a bank, whereas money market deposit accounts are liabilities for a bank, which can invest the money at its discretion - and potentially in (riskier) investments other than money market securities. In a money market fund, investors are buying securities and the brokerage is holding them. In a money market deposit account, investors are depositing money in the bank and the bank is investing it for itself and paying the investor the agreed-upon return.
If a bank can invest the funds at higher rates than it pays on the money market deposit account, it makes a profit. Money market deposit accounts offered by banks are FDIC insured, so they are safer than money market funds. They often provide a higher yield than a passbook savings account and can be competitive with money market funds, but may have limited transactions or minimum balance requirements.
The Bottom Line
Prior to the 2008 financial crisis, only one small institution fund broke the buck in the preceding 37 years. During the 2008 financial crisis, the U.S. government stepped in and offered to insure any money market fund, giving rise to the expectation that it would do so again if another such calamity were to occur. It's easy to conclude then that money market funds are very safe and a good option for an investor that wants a higher return than a bank account can provide, and an easy place to allocate cash awaiting future investment with a high level of liquidity. Although it's extremely unlikely that your money market fund will break the buck, it's a possibility that shouldn't be dismissed when the right conditions arise.
More From Investopedia
"Take my money, HBO!": Why you won't be able to watch Game of Thrones online anytime soon in the UK - New Statesman
Take My Money, HBO is a growing online campaign aimed at getting HBO, the American subscriber-TV network and home of the Sopranos, Game of Thrones and Curb Your Enthusiasm, to provide those without American cable, both "cord-cutters" and international audiences, a way to pay directly for the channels HBO streams through its HBOGO online service.
Currently, you can only receive HBOGO – the company's equivalent of BBC's iPlayer – if you subscribe to a participating American cable channel. Which isn't the best thing to tell people who want to move all their TV viewing online, or who don't actually live in America.
There are other ways to get HBO content, of course; you can wait until the DVD box set comes out, or buy it from iTunes once it is released there. But both of those are on a huge delay; the downloads and DVDs for Game of Thrones were finally made available this March, 11 months after the series started airing.
Alternatively, there is piracy. The day after most episodes aired, they were available in HD, for free, on sites like The Pirate Bay.
Clearly, that's not optimal. This comic, from earlier this year, neatly sums up the issues many had: Programs have aired, people are talking about them, but without a 1990s-style TV set-up, you can't actually watch them legally.
Hence, "Take My Money". The site asks users to tweet at HBOGO the amount they would be willing to pay for a subscription to the service; the average suggestiong is around $12 a month, according to TechCrunch
The business rationale at the first instance seems compelling. Digitopoly's Joshua Gans explains:
HBO has 29 million subscribers in the US paying around $10 per month. HBO receives $8 of that. That would seem to suggest that HBO couldn’t lose by offering a $12 per month subscription.
The fear for the company could be that, if they made another way to access their content, the cable companies would reduce their cut of the premium. But as Gans points out, in the US, where cable is the main form of broadband, most will keep a subscription of some sort anyway, and internationally, many have no option to get HBO at all.
The bigger problem is that HBO is far more intricately tied-up in the standard model of TV distribution than they might like to be. For one thing, it is in fact owned by Time Warner, the American broadcasting giant. For another, as Dan Frommer points out, there simply isn't the right infrastructure for such a thing to happen. HBO would have to support every major video game console, Mac OS, Windows, and probably Apple TV just to have a hope of getting on enough TV screens to even pay the money it cost to set up the system, let alone recoup the lost revenue from cancelled subscriptions.
And internationally the situation isn't much better. In the UK, Sky has forked out a reported £150m for a five-year exclusive with HBO; you can bet they wouldn't have paid nearly that much if it was available to anyone paying £10 online.
All of which means that if you are in the small (but likely over-represented in the New Statesman's readership) percentage of the UK population which watches barely any TV except for high-quality US imports, you are likely to have to carry on waiting or pirating for some time. Disruption may come to the market, but unless they are forced to, HBO just aren't going to take your moeny.
MONEY MARKETS-Spanish downgrade piles pressure on banks - Reuters UK
* Downgrade likely to hike repo costs for Spanish banks
* Spanish banks seen increasingly reliant on ECB cash
By Emelia Sithole-Matarise
LONDON, June 8 (Reuters) - Fitch's credit rating downgrade of Spain compounds funding problems for the country's struggling banks which may leave them even more reliant on the European Central Bank's cheap loans.
Fitch slashed Spain's credit rating late on Thursday, leaving it just two notches short of junk status. It signalled more downgrades could follow as expectations grew Madrid would ask the euro zone for help with recapitalising its stricken banks.
Cuts to individual Spanish banks' ratings are due to follow, which could complicate their use of repurchase markets which have been an important source of short-term cash.
Many of the big Spanish banks use clearing houses to reduce the risk and cost of repo trades using government bonds but the ratings downgrade will boost the cost, or the initial margin clearers require to offset risks.
"This means that for a number of banks...(that) clear through LCH.Clearnet the financing will become much more expensive through repo and it's possible that some banks will not be allowed to clear if they fall below BB+," said Don Smith, an economist at ICAP.
"LCH uses the most conservative of the ratings so this will have an impact of raising, if not immediately but after a short period, the cost of repo financing to banks which increases their reliance for short term funds from the ECB," he said.
Already earlier this week, banks' use of the ECB's weekly funding more than doubled as Spain's troubles left its institutions increasingly dependent on central bank support and as four Greek banks returned to mainstream ECB operations following a two week ban.
The ECB's weekly offering of limit-free 7-day funding saw a total of 96 banks take 119.4 billion euros, the highest since the second of its two 3-year injections at the end of February and more than double the 51.2 billion euros taken a week ago.
BANK RESCUE DETAILS EYED
Spanish banks have increasingly seen their access to funding markets shrink as they slid deeper into a crisis caused by a burst real estate bubble and the country's deteriorating fiscal situation.
"Effectively they were already locked out of the market...so it's not of huge concern as they were prevalent in tapping the ECB's liquidity operations," said Suki Mann, a credit strategist at Societe Generale.
"The latest downgrade doesn't help and it will mean they will need accommodative policy from elsewhere either from the ECB or some form of aid from the troika for the recapitalisation.".
The cost of insuring against a default by the country's banks jumped after Fitch's downgrade of the country's rating, with five-year credit default costs for Banco Santander rising by eight basis points to 412.5 bps while those for BBVA were up five bps at 447.5 bps, according to provider Markit.
Both Smith and Mann said they would wait to see the details of any planned Spanish bank rescue to see how far it would go in tackling the sector's problems.
I give all the money - The Sun
I’m 17. I work in a fast-food restaurant every evening, often getting home in the early hours of the morning. I am then expected to get up to take my little brothers to school and take my sister to nursery every day. I then pick them all up again at the end of each day.
I also look after my mum and do all the housework as she has been ill and can’t be left on her own. It’s exhausting. My mum charges me rent of £400 per month and keeps putting my rent up by £20 every six months. I never have any money for myself.
I can’t afford to go out at the weekends because I have to work to pay my mum otherwise I’ll be in debt to her. My parents deprive me of my things whenever I complain.
I need to move out but I can’t get any money together for a deposit because I give it all to my mum. I am starting to feel isolated and alone. None of my friends message me back when I try to talk to them on Facebook. I’m in a hopeless situation.
I am starting to think the best thing for me is suicide
Don’t even think about making a suicide attempt. You have a great life ahead of you even though things seem grim at the moment.
Please find someone in your family to confide in. They need to know what you’re up against at home and can work with local services and maybe find you somewhere else to live if need be.
Find a quiet time to talk to your mum about the rent you pay. Explain that you need a life of your own and to spend time with your friends. I am sending you my leaflet Family Finances so you can work out a fairer rent.
I’m also sending my leaflet Help for Carers as there may be a way of getting more support for your mum too so that so much doesn’t fall on you
Find understanding support through Get Connected who help under-25s with any problem – including housing (0808 808 4994, www.getconnected.org.uk).
Forex: USD/JPY set for consolidation – TD - FXStreet.com
Forex focus: even the major expat currencies are suffering - Daily Telegraph
The yuan has softened as a result, with last month's fall being the worst performance it has seen for five years.
Australia has been helped by surprisingly good growth figures posted this month.
"The Aussie dollar is more tied to China than anybody else's currency," says Jeremy Cook of World First, "and will remain so as long as China maintains its position as the manufacturing powerhouse it has become.
"However all these currencies are influenced by China. As China's factories slow, so does their appetite for raw material imports and this hurts the Australian economy and all the rest. Without growth these currencies will remain unloved."
These Antipodean currencies, along with Canada, are seen as commodity currencies as most of their output comes from mining of various resources including gold, minerals and oil along with soft commodities such as wheat and wool.
They've been booming since the turn of the century but this year has been rough on them, offering some desperately needed respite to expats relying on an income in sterling. It's not just China which is cooling down, India too has seen the brakes put on its booming expansion. And, of course, Europe is still one of their main trading partners.
Unlike the UK and much of Europe, they have plenty of options to ease the situation. One possible solution, if the politicians are anxious to boost their exchange rate and attract investors, is to increase the interest rate.
Josh Ferry Woodard of TorFX believes that both Canada and South Africa could hike their rates this year which will strengthen their currency. Meanwhile, Canada's poor domestic output for the first three months of the year dealt a severe blow to optimism surrounding the Loonie.
He says: "With 18-month highs in sight, the pound has been performing better against the Canadian dollar, in relative terms, than any of the other major currencies.
"There is a possibility that the damage done to the South African economy as a result of the euro crisis could in fact lead to an interest rate increase later on in the year to combat domestic inflation which could actually prove to be the catalyst towards a stronger rand."
One of the biggest winners in the currency wars at the moment is the US dollar. Unless they're earning in dollars, expats living in the States will be suffering as the pound has fallen back to within touching distance of 2010's two-year low.
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