Argentina moves to relax its currency controls ... Any Spanish oil companies want in??

Week commencing Monday 27th January 2014

This week in Brief

In the UK we have the all-important GDP figures for Q4 2013 which we expect to come in at 0.8%. Anything upwards of this figure should provide some significant strength for Sterling so this is definitely a release to watch.

In the US we also have their Q4 GDP release which we expect to come in at 3.2% annualised. The FOMC is unlikely to taper further this month, especially owing to the poor job creation numbers last month.

In Europe we expect German Ifo to continue to improve while CPI could well continue to shift upwards. Unemployment is likely to remain at its current year high of 12.1 percent, therefore expect a mixed week for the Euro.  

Market Themes & Current Events

Mario Draghi proved to be a hit at this year’s Global Economic Forum in Davos, saying that there has been a dramatic improvement in the Eurozone recovery over the past two years. Growth remains weak, fragile and uneven despite booming stock markets and a shift in recovery from exports to consumption, the ECB chief noted. Unemployment has also stabilized, albeit remaining very high. He also sought a change in laws in many countries to tackle youth unemployment. The central bank head also reiterated that Eurozone inflation is likely to remain below the two percent target for the next two years. While he does not foresee deflation in the currency bloc, he said risks could rise if very low inflation persists. He spoke as European leaders also agreed to create a common fund of EUR 55bn, subsidized by European banks over the next ten years. All in all, an extremely interesting week in the Swiss alps!

Sticking with the Davos theme, Bank of England governor Mark Carney has said there is no immediate need to increase interest rates, despite the recent fall in unemployment towards the 7 percent threshold. The Governor made it clear that even with falling unemployment, the UK's economic recovery had yet to reach "escape velocity" and that interest rates are likely to remain at historic lows. He suggested that even if it is not changed, the figure is not seen as important as it initially was in deciding whether interest rates would rise. The Governor has said previously that the Bank will consider other indicators. Despite the seemingly glowing reports published about the currency UK growth, he did mention that productivity growth had slowed, the debt burden remained high and that consumer confidence was subdued. Low inflation also meant that raising interest rates has become less urgent despite the growing economy. This dovish Carney cause Sterling to reverse much of its weekly gains on Friday, pushing the UK currency away from its highs against both the Euro and US Dollar. 

Moving to distant shores, Argentina is to relax its strict foreign exchange controls, a day after the peso suffered its steepest daily decline in 12 years. Bonds fell and the cost to insure the South American nation’s debt against default soared to a three-month high as traders bet the move could backfire and lead to further dollar outflows. This attempt to reduce restrictions in the currency market is the latest, and one of the boldest measure tried by President Cristina Fernandez de Kirchner. It seems she seeks to win back investors, regain access to international debt markets, shore up a faltering economy and curb inflation that soared to 28 percent last year. This move offers some perplexing notions for global investors, especially in the wake of the Argentinian nationalisation of Spanish oil company YPF’s assets in the region. Despite her words, the post announcement increase in CDS against the nation’s debt makes it the most expensive in the world. It seems the world requires slightly more reassurance Mrs Fernandez!

Finally over to the far east, where the Chinese manufacturing sector appears to have contracted in January. Weighed down by weaker domestic and export demand, the flash Markit/HSBC Purchasing Managers' Index (PM) fell to 49.6 in January from December's final reading of 50.5, dropping below the important 50 line indicating expansion. The flash PMI showed a faster rate of decrease in new export orders and employment in January. Within the PMI index, new orders came in at 49.8 which is the first contraction in six months. PMI surveys at the end of last year had confirmed that the economy’s momentum had been slowing, with the HSBC one showing a three-month low and the government's official PMI at a four-month low, however this release was by no means a foregone conclusion. Despite the slowdown, most analysts believe that growth will remain at an almost world beating 7 – 7.5 percent.

GBP This Week

We have an important week ahead for the UK economy with the release of the preliminary GDP figure for Q4 2013. The first of the two GDP releases is the year on year figure, which is expected to rise moderately to 2.0 percent. Interestingly the IMF has recently cited that the UK is the leading economy in Europe, with expectations of 2.4 percent growth in 2014. We are therefore looking for a strong figure on Tuesday to follow on from the outstanding reductions in unemployment seen over the recent months. Should this figure impress, we would expect further gains in Sterling as we move further towards the beginning of February.  

USD This Week

In the US we also have a very important, albeit busier week. The most important of the releases is certainly the FOMC announcement on Wednesday with regards to their next monetary policy decision. The decision from the Fed last month to taper their monthly purchases by USD 10 bn started their journey to completely eliminate their support for US bond markets, but given that tapering has been largely dictated by movements in the labour markets, many had thought a January taper would be unlikely following the lowest rate of job creation in a year. With this in mind, we agree with consensus and expect no change in monetary stimulus on Wednesday owing to the raft of positive figures apart from that non-farm payroll release. That said, the difficulty in projecting accurately the timescale of the Fed’s tapering means that this release is going to be the event of the week, and therefore a key driver of volatility moving forward.

Moving to Thursday we have the US GDP figure set to be releases. we are expecting to see a somewhat more muted figure of 3.2 percent following the rise of 4.1 percent on an annualised basis as measured from the Q3 figure. This figure is always crucial for investors from the macro perspective and given that this is the first estimate and the figure rounding up 2013 growth, we expect this release to be a key market mover.   

EUR This Week

We have a mixed set of releases out from Europe this week, with German business confidence, EZ CPI and unemployment rates all set to dominate sessions in Paris and Frankfurt. Improving sentiment over recent months has coincided with the sharp dovish shift in priced-in ECB monetary policy expectations. That hints that businesses newfound cheerful mood could be reflecting hopes that Mario Draghi and the ECB are preparing to expand stimulus efforts, a prospect that unfortunately hardly bodes well for the single currency.

Next on the list we have the Eurozone CPI figure, which Mario Draghi has managed to drag back into the limelight after Draghis 25 bp rate drop in response to the fall to 0.7 percent inflation. It seems that the threat of deflation appears to be back on the scene despite the recent uptick in CPI to 0.8% earlier this month. This week’s measure is expected to show a push back to 0.9 percent on a year on year basis, however should we see the figure fall short once again, we could see a situation where Draghi needs to consider negative interest rates to avoid deflationary concerns. Whatever the outcome, this will be a good read.

Finally we will be keeping a keen eye out for the Eurozone unemployment rate, due to be released on Friday morning. The current levels of unemployment are certainly a large drag on potential EZ growth, especially when put into a fiscal perspective in terms of the loss of tax revenue and increase in welfare payments. With the rate currently sitting around the 12.1 percent mark for almost a year, there is little to suggest the bloc is on a substantial path to reduce this key figure. Which this in mind, we expect the figure to, once again, post flat at 12.1 percent. It is worth noting however that any fall to or below the 12 percent mark would be extremely notable, and certainly would provide the Euro with some significant support. 


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