Bets go long on Sterling amid Chinese worries!

Week commencing Monday 27th August 2012

Overriding Market Themes

The UK recession is less deep than thought, according to figures published by the Office of National Statistics (ONS). The revised data shows that the economy contracted by 0.5% during the quarters, 0.2% less than original 0.7% predicted last month. The original estimate of a 0.7% contraction, which was published in July, was met with some scepticism by traders and industries that claimed they had seen little sign of such a serious economic downturn. It can also be said that the extra bank holiday could well have caused a 0.5% contraction alone, essentially indicating the UK economy flat lined instead of contracting. All in all, we should be in store for a better quarter this time, as many believe that GDP will rebound. 


It seems even the great Germany is finding itself in muddy waters was Business Confidence falls for the fourth month in a row, registering a 29-month low. The survey of 7,000 firms suggests businesses are increasingly wary about Germany’s ability to withstand the weak Eurozone economy. That said, growth is still in the positive, and Germany remains the largest economy in Europe by far, however Europe can scarcely afford to lose its bankroller. 


Profits at China’s industrial firms have dipped for a fourth month in a row, adding to fears that the Chinese economy is due a hard landing. Chinese firms are struggling by a slump in global demand for its products, as well as lacklustre demand domestically. This is especially worrying for China as its industrial sector is the key driver of the Chinese economy, and as such has no other developed markets on which to fall back on. In terms of GDP, China expanded at an annualised rate of 7.6% in the second quarter of the year, which although dwarfs western nations represents the lowest pace of growth in more than three years.


Hedge funds and large speculators are abandoning bets on a stronger US Dollar at the fastest pace ever amid growing confidence in the global economy. Traders seem to have less needs for the relative safety of asset dominated in the Greenback as the cost of insuring sovereign bonds for the group of 10 countries and other nations tumbles to the lowest levels in a year. One big benefactor is the Swedish Krona, back by interest rates about six times high that those of the US, UK and Europe has flown up in value in recent months. I am not suggesting that global fortunes are changing, however it seems that investors are starting to become more global once again.

GBP This Week

We do not have anything of great importance due for release in the UK this week, with Adam Posen’s speech at the Federal Reserve Bank of Kansas City likely to head up the pack. Also of some note is the Nationwide HPI index, which should show that property prices are beginning to recover from the recent spell of misfortune owing to a decline in mortgage approvals. In short, the Pound will likely be traded on sentiment rather than fundamentals this week, and make up the classic risk on/risk off trade.

USD This Week

Across the Atlantic we are watching the CB Consumer Confidence figure, which is out Tuesday afternoon. This should come in relatively flat, with perhaps a tendency to the downside as US consumers continue to hear bad press on the news wires. On Wednesday we have Preliminary GDP, which should come in at an annualised rate of 1.7% for the quarter. Moving into Thursday we have Unemployment Claims which once again, should come in reasonably flat compared with the previous release. Friday sees Ben Bernanke speaking at the Federal Reserve Bank of Kansas City's Economic Symposium, and much like Posen’s speech we will watch him to try and decipher any future interest rate clues.

EUR This Week

German Ifo Business Climate started the week off on Monday, with the result posting a decline of 1 point to 102.3. This continues to show that German business leaders feel that the economy is beginning to falter and that sentiment is continuing to ebb away. Moving to Thursday, we will watch the Italian 10 year bond auction, which will hopefully see a full take up whilst keeping the rate at which the Italian government borrows below 6%. Finally the ECB president Mario Draghi is due to speak at the Federal Reserve Bank of Kansas City's Economic Symposium on Friday.

In Other News

The situation in Syria seems to be worsening, with rebel forces downing a government helicopter in the outskirts of Damascus. The regime seems to be losing ground in every theatre here, and although the intervention of western forces is unlikely, I doubt the present government will be able to last much longer. My fear is that, although democratic change is necessary, the unknown element of any future government will cause perhaps more problems. Unlike Iraq and Libya, this new government will not have the military backing of the United States or the UK. In lighter news, we would like to urge people in Essex to pay extra special attention this week as reports of a lion on the loose fill the news wires. The irony is that this lion, supposedly the most savage of all land beasts, has probably never ever met some of the fine young folk of Essex. These chaps, revered for driving white Ford Escorts and getting into drunken brawls outside nightclubs, I suspect pose more of a threat to the lion that visa versa! For the Lions safety, let us hope that he is returned to somewhere safe soon!


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