Half of the PIGS get a breather as UK growth is slashed

Week Commencing Monday 14th April 2013

Overriding Market Themes

It seems that Portugal and Ireland are to be granted an extra seven years to pay back their emergency bailout loans, according to an agreement struck between the 17 member group in Dublin last week. The plan cites the need to give the countries financial systems more time to recover from the debt crisis after their bailout loans run out, with Ireland’s bailout money running out this year. The Irish and Portuguese repayment extensions are expected to be backed by all 27 European Union members, which include those outside the Eurozone, later on Friday. The extension however is particularly important to Portugal. Two years ago it pledged to take various measures in its budget to reduce public spending, however last week the country’s Constitutional Court rules that several of these measures in the 2013 budget were unlawful. If Portugal were to drop the agreed measures because of the ruling, it may not remain eligible for more funds under its bailout.


Over in Cyprus, it has emerged that the government will need to raise an extra 6 billion euros to secure the 10 billion euro bailout from Brussels and the IMF. While confirming that up to 10bn euros in loans will be provided to Cyprus, the Eurozone finance ministers also rejected reports that the country might be granted more financial assistance. To help raise the required capital under this arrangement, it is expected that Cyprus will sell much of its gold reserves, whilst bank depositors with more than 100,000 euros in savings will also bear part of the cost. On the back of its recent troubles, the Cypriot banking sector (on which much of the economy is dependent on) is shrinking, with thousands of jobs being lost. Laiki Bank, Cyprus’s second largest bank, is currently being wound up and its healthy assets transferred to the Bank of Cyprus. 


Over in the US, retail sales have fell in March across all sectors, official figures have shown, suggesting that the recent tax rises are starting to affect consumer spending. The US Commerce Department said that domestic consumers spent a total of 418 billion dollars last month, a fall of 0.4% on the previous month. This comes as both January and February’s figures were revised downwards, adding to the hypothesis that the US economy is stalling. In more damming news, jobs figures released last week showed less than 90,000 new jobs were created last month. Although there is job creation in the economy, as the population is growing, that number is well below the rate of job creation needed to maintain employment levels. This all paints a gloom short to medium term picture for the world’s biggest economy, and despite the 2% growth forecast, the US economy is very fragile indeed.


Back on home soil, the acclaimed Ernst & Young Item Club has said that the British economy will grow less than previously forecast this year, in what will be seen as a further damning report against the government’s austerity drive. They also speculated that further bond purchases by the Bank of England may do little to stimulate the recover. Within the report they say that GDP will rise 0.6% compared with a January forecast of 0.9%, however it will accelerate to 1.9% in 2014 and 2.5% in 2015. The government’s austerity program and the continuing recession in the euro area continues to act as a drag on British growth prospects. That said, some positive movements by the treasury has been stoking optimism in financial markets, for instance the pledge of 3.5 billion pounds to boost the housing market and the revamped Bank of England have given the government renewed credibility. 

GBP This Week

This is a big week for Sterling with a vast amount of data scheduled to be released, starting with CPI and PPI Input on Tuesday.  CPI is the most important inflation indicator, and is often a market-mover. The index has been very steady in recent readings, and posted a gain of 2.8% last month and therefore we do not anticipate a change in this reading. This is followed by PPI Input, which measures the prices paid by manufacturers for goods and raw materials. The index was up sharply in March, rising 3.2%. The markets are expecting a much weaker April release, with a forecast of a 0.3% decline. On Wednesday the Claimant Count Change is eagerly awaited by analysts. The indicator has suffered from four straight declines of late, although in March the loss was a modest 1,500. The forecast for April is flat, and if we see the indicator push into positive territory, we could see the pound gain momentum. The Unemployment Rate will also be released at the same time. The rate has been stuck at 7.8% for the past two readings, and is expected to remain at this level in the April release. Finally, Thursday’s Retail Sales should be an interesting read, especially as it posted an outstanding figure for March, jumping 2.1%. The markets are bracing for a decline this month however, with a forecast of -0.3%. Once again, any positive posting is likely to give Sterling a much needed boost.


Despite sharp UK Manufacturing numbers surprising the market last week and EU/US data looking bleak, Sterling failed to post huge gains last week. The markets seem to be disheartened by the UK economy, and this is likely to continue weighing against the Pound. If we see some positive UK employment figures this week, perhaps this trend can begin to be reversed.

USD This Week

We start the Dollar week with Building Permits, which is projected to post a small decline to 940k this month. Despite the decline, the index posted a five year high in February of 946k, so even a small decline is likely to be received well. We then move to the CPI release, which is expected to remain flat whilst Core CPI is expected to rise to 0.2% on the back of increasing gas prices. We then move to Thursday’s unemployment figures, which is released in the wake of last week’s seasonally adjusted drop from 388k to 346k. Despite expectations that economic growth accelerated in the first quarter of the year to an annual rate of 3%, we anticipate a slight increase to 347k in this release. Finally, Manufacturing in the Philadelphia region unexpectedly surged in March to 2 from -12.5 amid a rise in orders and factory employment. As with most large surges, we expect the figure to claw back from its gains, and expect the release to post -3 this week. 


With the US economy starting to post some ‘relatively’ dire figure of last, we have seen it concede some ground against European and other majors. This week’s data set seems no difference and so we expect dollar strength to be subdued. Sterling will cement itself above the 1.51 level, at least for the short term as it begins to post more positive data. The Euro, despite also posting dire data last week, should have some support at the hugely psychological level of 1.30. 

EUR This Week

Not a massive week for the Eurozone, which kicks off with German ZEW on Tuesday. Recent data on growing consumption and private investments support analysts’ views that the German economy is rebounding. We believe that the indicator will drop to 41.6 this time, despite the more bullish sentiment. This is still considerably higher than the all-European figure, which is expected to decline to 31.5 this time. We then move to Mario Draghi’s speech in Strasbourg, where he will be talking about the ECB’s activities at the European Parliament. Judging by how he caused EUR/USD to swing in his last rate decision press conference, this should be an interesting watch. Finally, we will be watching the Spanish 10 year bond auction on Thursday, which last month saw yields drop to a shirt term low of 4.48%. We believe that this risk on trend will continue and we should have a reasonably positive turnout. 


European indicators are far from shining, and are likely to continue weighing down the single currency. Despite poor US data being published, we expect EUR/USD to struggle to push through the all important 1.3170 level, as momentum becomes hard to find. Against Sterling, we expect to see the Pound continue to test the 1.18 level and to potentially push through, especially if we see positive releases.

In Other News

We would like to add our condolences to the Thatcher family as preparations continue to lay to rest the former prime minister. Baroness Thatcher was a controversial figure, and regardless of political leaning or personal view, was quite a remarkable woman. Her conviction and drive to do what she though was right is legendary, and whether people believe she built or destroyed the country, she should be remembered with respect and dignity. Meanwhile, tensions continue to rise on the Korean peninsula as Secretary of State John Kerry call on the north to come to the table. Despite pleas, the north are expected to continue to make preparations to launch a ballistic missile this week, a move which many believe could spark the region into conflict. 


Let us know your thoughts or comment's on today's market report. Email the author at andrew.jolliffe@nucurrencies.com.



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