Another Euro Summit and another resolution ... but will it work?
Week commencing Monday 02nd July 2012
Overriding Market Themes
Global economic sentiment seems on the rise as markets digest the news flowing out of the Eurozone leaders agreed bailout deal for the regions banks. Stock markets across the world rose, with Greece’s ASE rising by nearly 6 percent. The news has not just helped European banks though as bond yields across the board dropped sharply in the zone. Italian yield hit a new low of 4.5 percent and Spain’s yield hitting 5.8 percent, which contrast massively from their previous levels of 7 percent, which many believe to be the critical mark where countries ask for bailouts. Of course, any new European wide decision is good for markets; however is this a sign of things to come? Unfortunately I am sceptical, what Europe needs is a full fiscal union, but unfortunately politically this seems to be an impossibility so expect the road to continue to be choppy for the foreseeable future.
Back in blighty, Mervyn King seems pessimistic about the short term prospects of the global economy, which is no doubt an excuse for what he sees as pessimistic short term prospects for the UK economy. Speaking at the Treasury Committee, Sir Mervyn said that he is particularly worried about the worsening situation in Asia and other emerging markets, and a sudden drop in income tax receipts, which forced the British Government to borrow an additional 2 billion pounds in June than previously. I can understand his concern with the Asian market, which has long been seen as impervious to these European troubles, however his jab at UK borrowing is even more worrying. The UK saw a 7.3 percent decline in income tax receipts and an increase in welfare benefits of 11.7 percent. This will only continue to mount pressure on George Osbourne to change plan A, and will most likely mean an increase in QE in the coming MPC meeting.
King’s comments come as China’s manufacturing activity grew at its slowest pace in 7 months, as the official purchasing managers index fell to 50.2 from 50.4 on Sunday. Most of this slowdown can be attributed to the slowdown in consumption in both Europe and the United States, however it seems that internal demand from China’s burgeoning middle class is also slowing. The situation is also echoed in Germany, which saw unemployment rise to 6.8 percent in June, adding a further seven thousand people to the nearly 3 million Germans currently out of work. Germany, like China, has been one of the best performers in terms of GDP growth over the past years, growing by roughly 3 percent. It is however, also struggling to find customers as demand from European counterparts continues to decline.
GBP This Week
Thursday is the big day when we head whether the Bank of England will increase its asset purchasing program. Many analysts believe that the bank will extend its program by a further 50 billion pounds as it struggled to keep the economy growing into the latter half of 2012. We also see Manufacturing, Construction and Services PMI releases this week, which all are expected to close lower as the economy continues to struggle lifting itself out of the lull created by the global slowdown.
All in all it could be a bad week for Sterling vs Euro as European markets pick up on the successes from the European summit. The Dollar may see some losses against Sterling however as an increase in global sentiment give rise to more risk on trading. I would imagine that QE is likely to be priced in owing to the voting last month.
USD This Week
Thursday sees a raft of US data, including Unemployment Claims and ISM non-Manufacturing PMI. I don’t think that unemployment claims should stoke up markets however and it should remain reasonably flat. The unemployment rate is due to be released on Friday, and in line with my previous statement I believe that it will remain level at 8.2 percent.
The dollar should fall victim to more risk on trading as we progress through the week, obviously unless we see another disaster in the Euro area.
EUR This Week
A reasonably quiet week in Europe with the Spanish 10 year bond auction taking the lime light for many. I expect yields to continue to fall; easing the pressure on Spain’s borrowing costs and no doubt cementing positive moves in the IBEX. The only other event of note is the ECB rate decision and press conference. We could well see a 25 basis point drop in the headline rate of interest and Mario Draghi tries to stoke up economic growth.
The Euro should be one of the main victors this week as sentiment returns to the zone, but expect it to struggle on its way up as traders continue to worry about further consolidation.
In Other News
Congratulations to Spain for a sweeping victory against the Italians in the Euro 2012 final. They made it look easy towards the end, and dispelled any thought that ‘if only England had managed to win the penalty shootout’. It does seem that Spain possess the best team in the world, and to their credit I believe them. In more politically charged news, the new Egyptian president has been sworn in at a historic ceremony in Cairo. Field Marshal Tantawi, the leader of the military council, handed over power to the newly elected leader of the Muslim Brotherhood, who becomes the first elected civilian government since Mubarak was removed.
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