Cameron on the benefit war path

Week Commencing Monday 25 June 2012

Overriding Market Themes

Europe’s four biggest economies have agreed, in principle, to measures aimed at boosting growth equal to 1 percent from the Euro area. Germany, France, Italy and Spain outlined the 130 billion Euro plan at a joint meeting held together in Rome ahead of the EU summit on the Euro crisis this week. Points of note in their package are an increase in the capital of the European Investment Bank, which would allow the EU backed institution to increase its lending to struggling businesses in the Eurozone. Secondly, agreeing to fully deploy the unused funds in the European Commission’s regional funds, and finally the creation of a pan-European ‘project bonds’ or common debt used to finance specific projects aimed at boosting growth. They also discussed a transaction tax, which as we all know is intensely opposed by the UK Government, although the general consensus is that no transaction tax will be imposed to the EU as a whole, some member states could push ahead with the idea on their own.


Back in blightly, David Cameron has suggested that people under the age of 25 could lose their right to housing benefit, amongst other incentives, and the government continues to seek savings in their welfare budget. This is likely to cause some significant problems for the already strained relationship he enjoys with his Liberal Democrat coalition partners, which at the moment seems more like a coalition of the forced instead of a coalition of the willing. It does however show, that despite the current hardships the economy is facing, such as poor retail sales and recessionary pressures, the government is still hell bent of continuing its policies of debt busting and austerity. It seems the UK is playing a dangerous game, and will likely either emerge from this deep economic crisis as the greatest winner in the western world or the saddest looser.


That said, despite the doom and gloom around, UK unemployment fell last week by 51,000 to 2.61 million in the first three months to April. Also, according to the Office for National Statistics (ONS) the jobless rate fell to 8.2%. The claimant count however, which measures the number of people claiming jobseekers allowances, increased by 8,100 in May compared to April, to 1.6 million. Obviously this is a good sign for things to come, and plays into the hands of economists who believe that the economy will bounce back into growth in the second quarter of the year. It seems that the good news isn’t enough for many who sit on the Monetary Policy Committee though, with 4 out of the 9 members (including Mervyn King himself) backing an increase in the level of Quantitative easing from its current level of GBP 325 billion. Mervyn King, David Miles and Adam Posen all voted for a GBP 50 billion rise while Paul Fischer favoured a GBP 25 billion rise. 


The Islamist Mohammed Mursi has been elected as Egypt’s new president, in what seemed to have been a close fought race to the top. This concludes an acrimonious race which has divided a nation whose economy is flagging and where the military has restricted the advance of democratic voting. Mursi defeated Ahmed Shafik, who served under Mubarak’s last premiership. What does this mean for the region’s largest economy? Well although politically things may get somewhat more strained between London/Washington and Cairo, business should begin to flourish once more as the political wrangling comes to an end. That said, I wonder if Sharm El Sheikh will continue to welcome scantily clad British tourists from now on?

GBP This Week

Tuesday sees the release of Public Sector Net Borrowing and the Inflation Report, with the former showing a slight increase in the level of borrowing undertaken by the UK Government this month. The inflation report I doubt will add anything of enormous value to the markets as it gets underway. Thursday’s current account should show a further deficit in the UK’s trade balance for the quarter, with the difference between imported and exported goods likely to reach 8.9 billion. Finally on the headline side of data releases, Mervyn King is set to hold a press conference on Friday about the Financial Stability Report, which usually stokes some responses from the markets.


Sterling should be set for a good week as the markets settle down after an exciting week in the Eurozone, although gains should be marked as confidence is slow to fester.

USD This Week

New home sales starts the week off, with a small increase projected of roughly 4 thousand for June. The Conference Board, which surveys about 5,000 households which asks respondents to rate the overall economic situation, should close lower as householders continue to worry about Europe. Wednesday sees the Core Durable Goods and Pending Home Sales releases, which all should close slightly higher than expected. Finally, Thursday’s Unemployment Claims should close flat, so I don’t expect it to influence the markets massively.

EUR This Week

Headline of the week is the EU Economic Summit, where the heads of state are all due to meet to discuss the continuing issues. Watching press releases from this summit will likely be the main pastime of traders around the world as they try to identify the level of action which the leaders will agree on. Friday sees an Italian 10 year bond auction, which hopefully should see the yield drop however this will be dependent on conclusions from the summit.

In Other News

Sometimes I don’t know why I watch it, but watching England was almost torturous on Sunday evening during our match with the Italians. I suppose we can rest a little easier knowing that we have a good goalkeeper, but sometimes I believe that my 74 year old father completes more promising passes to his grandchildren then most of our national team. A shame indeed, although now at least we won’t face humiliation against the all mighty Deutschland this week!  


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