George wakes up with more money in the tills!! HS3 anyone?

Week Commencing Monday 25th May 2015

This Week in Brief

In the UK we have the Queens speech, which should provide important policy guidance on the new governments plans for fiscal consolidation. Outside of the speech, the second reading of GDP is expect to be republished 0.1 percentage points higher at 0.4 percent.

In the US we expect a mixed week with business and consumer confidence expected to rise, while the second revision of GDP is expected to post negative at -0.9. Likewise, durable goods is expected to come in lower than expected while new and pending home sales should beat expectations.

In Europe all eyes are focused on the Greek situation, who have a large EU/IMF bill to pay in the next few weeks. Greek politicians have said they do not have the required funds without a further loan from their creditors, however the creditors are unwilling to budge given proposed debt restructuring. This is without question the event to watch this week!

Overriding Market Themes

Greece is threatening to default on its next IMF loan repayment, claiming it does not have the funds to satisfy creditors at the same time as honour wage and pension payments to its citizens. With this crucial debt payment due, combined with the need for Athens to find a further 1bn euro to pay public sector workers, it certainly appears that we are approaching the final crunch in this disaster story. Without sounding too gloomy, it is clear that both sides are far from finding a compromise deal! Greece has spent the last four months quarrelling with the EU and IMF, and although some senior EU and IMF figures have urged greater flexibility from creditors, coupled with a drop in some of the Greek demands, it does seem that the fundamental differences between the two camps may be too large to agree on. Tsipras, the Greek Prime Minister, has attempted to persuade Angela Merkel to strike a broader deal that includes the refinancing of the entire bailout package in return for commitments to tackle tax avoidance and a re-designing of the Greek welfare system, without success. Either way, what lies in store the European project is unknown with a Greek exit a distinct possibility, with some pundits saying an exit would bolster the zone while others saying it would lead to collapse. One thing is certain, we expect some significant volatility in markets over the course of the coming weeks, with the Euro continuing to remain pressurised to the downside.

Moving to the UK, Chancellor George Osbourne received a welcome boost as tax receipts ballooned over the month, leading to a sharp decline in government borrowing. The government is aiming for GBP 75.3 billion in borrowing over the course of the current financial year, however the latest figures showed the government borrowed a net 6.8 billion GBP last month. This figure was 2.5 billion lower than markets expected and gave Sterling a further rise against an embattled Euro and a relatively bullish US Dollar. Diving into the figures, April’s VAT tax take of GBP 10.6 billion was the best on the month since records began while the Treasury also enjoyed the highest corporation tax receipts since the financial crisis. Meanwhile, low inflation has lowered government debt repayments on inflation-linked debt.  This bodes well for the Chancellors plans to rid the country of its budget deficit by 2018/19 with a fresh round of cuts to welfare and departmental spending. Will it be clear sailing for the chancellor however with the governments slim majority, or will the SNP manage to galvanise support for a reduction in the scale of cuts? Who ever said that majority governments lead to boring governments?

GBP This Week

In the UK we have the annual Queens Speech, which will likely be the highlight both from a macro-economic and pomp perspective. We believe a tighter fiscal policy from the UK government should begin to shore up Sterling’s performance, especially against the Euro which continued to suffer pre-potential Greek implosion! In terms of data, we expect the second GDP print to be revised up from 0.3 percent to 0.4 percent. Finally, business investment is also expected to grow again after a disappointing last quarter in 2014. All things being equal, this should be a good week for the UK and consequently, Sterling.

USD This Week

In the US, we expect a slightly disappointing print for durable goods from 0.3 percent on the month coupled with an improved new home sales figure. We also expect a positive release on pending home sales on Thursday with the indicator growing by 3 percent on the month. Business and consumer sentiment is also expected to improve, with Chicago PMI to rise to 53.0 from 52.3 while the Michigan consumer sentiment figure should come in at 90.0 from the 88.6 preliminary reading. Finally, the second estimate of Q1 GDP is expected to be revised down to -0.9 percent.

With the above in mind, you would be forgiven to assume a reasonably volatile week for the greenback. However, with a clearer picture in place from the Fed with respect to the potential near-term rate hike, the Dollar is poised to continue to outperform its peers. Expect more robustness moving forward in the near-term, perhaps with the exception of Sterling which continues to trade higher on the back of the general election.

EUR This Week

The Euro has a reasonably light calendar for the week ahead, with all eyes remaining on the continued political uncertainty in/with Greece. On the data side, markets expect further improvement in money growth to 4.9 percent in April, from 4.6 percent previously. Meanwhile, we expect preliminary May inflation numbers to start coming in for member states, with Italy and Spain expecting to see a marginal rise by 0.2 percentage points to +0.1 percent and -0.5 percent respectively.  

26 May 2015


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