Bernanke gets his wallet out while Spain risks needing one!

Week commencing Monday 17th September 2012

Overriding Market Themes

Global stock markets have risen after the US Federal Reserve moved to pump more money into the US Economy. The Fed’s plan was announced on Thursday and will inject an additional USD 40 billion a month in the economy. Hopefully this additional money will stimulate both corporate and consumer growth over the coming years, and continue to allow to US to defy gravity and grow at one of the fastest rates in the G8. Across the pond however, fears continue to persist as the International Monetary Fund and the European Central Bank deny that they are in bailout talks with Spain, which rumours run rife. Spain, one of the largest economies in the Eurozone would absorb a large proportion of the European Stability Mechanism (ESM), making a bailout of other countries that much more difficult, potentially creating medium term default risk for other highly indebted EZ countries like Italy.


It seems that even the mighty Brazil is slowing down in the face of lacklustre global growth. The country has cut its forecasts to 2% growth this year, which represents the weakest annual performance since 2009 and a sharp slowdown from the 7.5% growth it posted in 2010. To try and combat this slump in growth, the government recently launched the first in a series of measures that could inject USD 50 Billion into the economy over the next 5 years, although this has done little to bolster markets in Rio. Brazil remains incredibly susceptible to any decline in international manufacturing or construction, as it is one of the world’s biggest raw material producers. I doubt that the Brits will ever overtake them, as they did us in terms of GDP this year, however they more than anyone should desire a strong and buoyant Eurozone. An Eurozone who, after all, is their biggest trading partner. 


Squabbling among European government over the next phase of the plan to overcome the regions sovereign debt crises has raised fears of renewed turmoil as last week’s market rally eased pressure to forge a common path. European finance ministers are meeting in Nicosia, Cyprus, to discuss the deadlock over the timetable for a more unified EU banking sector, with a German led coalition push against a more ambitious plan tabled by France, Spain and Italy. If this one discussion was not enough, bickering is also surrounding the terms of any ESM bailout requests and the role of the European Central Bank. Last week’s German high court ruling on bailout funding seemed to be a massive turning point in the regions fortunes, with the Euro climbing 1.1 percent on the 14th, admittedly helped along by the US Federal Reserve, being the rally this month against the US Dollar to 4.4 percent, one of the largest gains for some time against the greenback.

GBP This Week

Sterling’s data schedule starts with CPI for the year on Tuesday morning. I expect the release to come in roughly level with the previous release at 2.5%, indicating that the change in the price of goods and services purchased by consumers is remaining relatively stable. I will also be watching for the Bank of England inflation letter, which hopefully should be a good read. Wednesday we have the release of the MPC minutes, which will be even more interesting as the prospect of more QE continues to loom over the economy. Moving into Thursday we have Retail Sales for the month, which by my reckoning should decline by 0.4% as the Olympic boom comes to an end. Finally, Friday sees the release of the Public Sector Net Borrowing figure, which should come in at a whopping 13 billion compared to the reduction of 1.8 billion the month before. This is expected as last month was expensive for the treasury with the Olympics, however the country can scarcely afford it.  

USD This Week

Wednesday kicks off the USD data, with Building permits and Existing Homes Sales heading the pack. I expect the number of new residential building permits issued to remain relatively stable at 0.71 million permits for September, and the number of home sales to increase slightly. Moving into Thursday, we have Unemployment Claims and the Federal Reserve Bank of Philadelphia Manufacturing Index. Unemployment claims should contract by around 10 thousand over the month as the economy continues to create jobs and grow, whilst the manufacturing index should closing the gap from -7.1 last month to somewhere around -4.1. 

EUR This Week

German ZEW Economic Sentiment starts the ball rolling on Tuesday, with many analysts expecting a slight increase from the dismal -25.5 posted last month. I expect the index to post somewhere in the region of -19 as the German economy continues to struggle with the Eurozone, but is bolstered by domestic consumption. Thursday however is the big day with German Flash Manufacturing expected to post a more bullish 45.4 against the 44.7 we saw last month. The Spanish are holding a 10 year bond auction also, which should be interesting to see whether the bailout rumours are reflected in the yield. Finally, Mario Draghi is holding a press conference at the European Systemic Risk Board Meeting in Frankfurt. Any additional hints of extra powers to the ECB or general chit chat about extra stimulus would continue to stoke the Euro bulls moving into the end of the month.

In Other News

I was saddened to see that the Duke and Duchess of Cambridge are under the sort of pressures we all though ended with the tragic death of Williams mother back in 1997. It takes a particularly nasty and heartless individual to crawl through private property to try and get a snap of a young couple enjoying some time out, and then to print these pictures for the world to see. I have always been a fan of Kate Wales, and I appreciate that unfortunately with great fortune comes great responsibility however I think having topless pictures taking from a vast distance, without your knowledge, is taking that saying a little too far. I hope their legal case goes well and they nail these guys, although I doubt this type of pressure will ever end unfortunately. 


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