George extends his loans to small business as Retail Sales slump

Week Commencing Monday 22nd April 2013

Overriding Market Themes

Retail sales in March were 0.7% lower than in February because of bad weather, according to the Office for National Statistics (ONS). The ONS also said retail sales volumes last month were 0.5% lower than a year earlier. The decline was in line with analysts' expectations. Interestingly however, in value terms, retail sales were 0.1% higher. This release comes at a bad time for George Osborne, who is preparing to defend his fiscal plans “aggressively” when an IMF team arrives in London to make its annual (Article IV) assessment of the British economy. He appears prepared to defy their recommendations, if necessary, stating “If they recommend we loosen fiscal policy, we won't do it ”. 


It seems George has been busy though, as he is set to announce a boost to lending to small businesses. The chancellor is expected to announce an extension to the Bank of England-run Funding for Lending Scheme (FLS) in the coming weeks. The scheme was launched in August and was due to expire in January 2014. The move comes amid pressure from the International Monetary Fund (IMF) for George to reconsider the pace of his austerity programme, and no doubt follows the decision by Fitch Ratings to strip the UK of its triple-A status on Friday, becoming the second of the big three rating agencies to do so. Will this be enough to woo the IMF back on Mr Osborne’s side? Unlikely! Especially as the scheme to date has been criticized because BoE figures suggest participating banks were lending less money overall in the second half of 2012 than they were in the previous six months.


The world’s third largest economy has reported a record trade deficit for the last financial year. The deficit hit 8.17trillion yen (which roughly equated to £54.5 billion) as a slump in global demand hurt exports, while greater domestic consumption of fuel and a weak Yen boosted imports. Japan was traditionally known for its exports, but has seen its trade patterns shift in recent times. They have seen exports decline from a slump in demand from key markets such as the US and Europe, while a territorial dispute has hurt sales to China. On the flip side, imports prices have risen, driven mainly by an increased demand for fuel. This has become especially prevalent after the 2011 Fukushima Daiichi nuclear plant crisis and resulting radiation leaks. Utility providers have had to turn to traditional thermal power stations to generate electricity, and in the absence of domestic coal and gas stock, import prices have skyrocketed. 


Giorgio Napolitano won a second term as Italian president on the sixth ballot. The 87 year old will be sworn in for a second term today as votes speculate on what his coalition will look like, with consultations on a new government taking place as soon as tomorrow. He was re-elected on April 20 after the country’s divided Parliament failed to agree on a candidate in the first five rounds of voting, an stalemate that led Democratic Party leader Pier Luigi Bersani to resign. It now seems likely that Napolitano will ask former PM Giuliano Amato to lead a new government, with Angelino Alfano of the People of Liberty party and Enrico Letta of the Democratic Party as his deputies. Under this scenario, we expect new elections to be called in H1 14 at the earliest, most likely under a new (more efficient) electoral law. Let us hope this brings an end to the Italian political warmongering which has plagued the country for nearly a year.

GBP This Week

This is a quiet week on the UK data side with UK Preliminary GDP stealing the limelight. The posting has looked sluggish in recent readings, posting only one positive reading in the past five releases. The markets are expecting a marginal increase of 0.1% in this upcoming release, however risk remains to the downside. Apart from GDP, we will be watching BoE Deputy Governor Paul Tucker speak at a forum in New York on Monday. HE is more hawkish than most, so expect his to give Sterling a small break from its battering against the US Dollar.


We do remain bearish on the Pound as we move into the fourth week of the month. The markets remain downbeat on the UK economy, a sentiment which was underscored by the Fitch downgrade this weekend. Any further weak data releases we see will most likely continue to push the Pound down against the Dollar and Euro, especially the GDP release which if negative would be disastrous. Expect the Pound to continue to trade above 1.50, but to continue losing ground against the US Dollar. The Euro is performing better now, and should keep Sterling entrenched in the low 16’s for the week.   

USD This Week

We start the USD week with Existing and new Home Sales, which we expect to come in at 5.02 million and 420,000 respectively. Both of these indicators should show a strong gaining in pace in the US housing sector, indicating that not only are credit conditions easing in the US, but demand remains unaffected by the new swath of taxes introduced by the Obama administration. We expect an expansion of 3.1% for the first quarter of 2013 however as personal consumption rebounds.


We remain bullish on the Dollar, which has performed well against its peers during the first quarter and seems to be holding its ground in the second. GDP will most likely be the biggest market mover of the week, and if we see this come in anywhere like last quarter, expect the dollar to sell off sharply. We do however expect the Dollar to maintain its stance against the Pound and Euro, offering tough resistance to their advances. 

EUR This Week

We start the Euro week with Deutsche Bundesbank President Jens Weidmann speaking in Washington DC. He is renowned for causing volatility in the market after he single handedly sent the euro down with his hint of a rate cut. We then move to Tuesdays Flash French and German Manufacturing PMI releases, which are expected to come in at 44.2 and 79 respectively, citing the deteriorating situation in Cyprus as the main contributor to these declines. Finally, we are watching the German Ifo Business Climate with a further decline to 106.4 expected. 


Europe continues to suffer from a wide range of issues, starting with the debt crises in Cyprus, Slovenia and Portugal to the semi-resolved political situation in Italy. Despite terrible US and UK data being posted in the past weeks, if both countries post positive GDP figures this week it will be an indication that Europe is continuing to pay the price for their monetary union. 

In Other News

I am very glad that the London marathon went off without a hitch, and especially after the terrifying events that unfolded in Boston last week. Tens of thousands of runners wore black ribbons on their vests in honour of the victims as a record 700,000 spectators lined the streets. The men's race was won by Ethiopian Tsegaye Kebede, who overtook 2011 champion Emmanuel Mutai in the closing stages, in a time of 2:06:04.


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