Geo-political risk dominates Europe as EU leaders weigh up options!

WEEK COMMENCING MONDAY 21ST JULY 2014


THIS WEEK IN BRIEF



  • In the UK we expect the Bank of England minutes to show no dissenters, however expect an uptick in the rhetoric. UK GDP and Retail Sales are also expected, both of which are expected to be GBP bullish.

  • In the US we expect CPI to push towards the 2 percent FOMC threshold while Durable Goods are expected to grow by 0.6 percent.

  • In Europe we expect the German consumer climate figure to come in flat, while the Services and Manufacturing PMI’s should be mixed. All in all, a reasonably poor week is expected for the Euro.


OVER-RIDING MARKET THEMES


The UK economy should have finally passed its pre-2008 financial crisis peak last week, according to the latest batch of figures from the EY Item Club. UK GDP will hit 3.1 percent this year, spurred on by strong capital investment by businesses and consumer spending. The Item Club raised its forecast for growth this year from a previous high of 2.9 percent, which compared to its projected growth numbers for Canada at 2 percent and Germany at 1.8 percent are phenomenal. The Item Club also forecast that interest rates, despite heavy speculation that they will be risen this year, will not raise until 2015. EY believes this is because wages are not rising as fast as inflation, with the average wage in the UK only increasing by 0.7 percent in the latest ONS report. Finally, the report also speculates that unemployment, which is currently sitting at 6.5 percent, will fall to a post-crisis low of 5.6 percent by the end of 2015. All in all, this is an incredibly bullish report for the UK’s economic prospects moving forward, and although headwinds remain (the Scottish independence referendum for example), things seem to be well and truly on the up for the UK economy.  


Sticking with a very UK themed report, UK inflation accelerated faster than economists forecast to its highest level since January, fuelling speculation that the Bank of England could raise interest rates within months.  Consumer prices rose by 1.9 percent in June when compared with a year earlier, up from 1.5 percent in May. Sterling and government bond yields jumped skywards after the figures were released as traders continued to speculate that the Bank of England will be the first of the G4 central banks to raise interest rates since the beginning of the financial crisis.


Moving to a more geo-political standpoint, it seems clear that the post MH17 plane crash environment is changing for Vladimir Putin, with considerably more pressure on western leaders to impose sanctions. This comes as both the US and EU have already bolstered sanctions against Russia over its alleged support of separatists fighting the newly forged Ukrainian government in the east of the country. Sanctions from the EU include it asking the EIB Investment Bank to no longer fund Russian projects, while the US announced further measures on both Russian individuals and companies. In a more interesting divergence, the two self-proclaimed rebel entities in eastern Ukraine are also on the list – the Donetsk People’s Republic and the Luhansk People’s Republic. Sanctions have been hitting harder than many politicians in Russia are admitting, with the fundamentally sound economy being forced into an artificially induced recession. How far this situation will develop, no one knows! However, this is by far the largest threat to both economic and political stability globally for the remainder of 2014.


GBP THIS WEEK


We have an interesting week ahead of UK data this week, with the Bank of England minutes, retail sales and Preliminary GDP the headlining releases. Starting with the minutes, despite our view that rates will likely be risen next year, it will be interesting to see the tone set by the MPC regarding when a rise should happen. We imagine that most members will be getting a little uncomfortable with the current level of interest rates, even if they do not dissent from the Mark Carney’s party line. If we do see some particularly hawkish comments from some members, it would be a good indication that raising rates has become the banks number one priority. If this where to happen, expect some significant Sterling buying on the back. 


The GDP figure and retail sales are also on the agenda, with the UK expect to have grown by 0.8 percent in the second quarter. Retail sales are expected to jump by 0.3 percent in June, following its 0.5 percent decline in May. This would mean that the UK economy has posted positive Retail sales numbers for four out of the last five months, a further indication to the Bank of England of the economy’s sustainability.


USD THIS WEEK


We have a number of highly important US releases this week, starting with CPI inflation for June. With the figure closing in on the Fed’s 2 percent inflation target, traders are likely to pay particular attention to this release. With the Fed in the same boat as the Bank of England, a near 2 percent release this time will clearly add to the calls for a rate hike and as such, support the US Dollar.


Apart from the above, we will be watching the durable goods orders release as this gives a good indication of how people and business view the long term health of the economy. This is a particularly volatile release however in general it has been improving, and another good release is expected for June at 0.6 percent.


EUR THIS WEEK


Thursday is the busiest day on the economic calendar front for Europe, with the Gfk consumer climate figure for German kicking off proceedings. We expect the July print to remain at 8.9 percent, following the unexpected spike higher last month. If this number can be maintained, it should be an encouraging sign for Germany, which has been trying to improve on the consumer side.


Also on Thursday are the manufacturing and services PMI releases for Germany, France and the Eurozone as a whole. With the exception of the German figures, these have disappointed in the past and unfortunately we expect much of the same.


Finally, German and European Ifo business climate figures should be an interesting read. Unfortunately, we expect a continuation of the disappointing trend in the German Ifo release, and therefore we also expect a disappointing EU release also.  

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