Israel beats the war drum as the currency wars expand!

Week Commencing Monday 27th May 2013

Overriding Market Themes

European Central Bank president Mario Draghi has said that he sees tangible signs of improvement in the UK economy during his visit to London last week. This statement came as he was alluding to the current political debate within the UK about its membership of the European Union. Mr Draghi said both sides would benefit from closer understanding, stating “What I can say is that Europe needs a more European UK as much as the UK needs a more British Europe.”. The statement was not well received by right wing UK conservatives and the UKIP party, who dismissed the president’s clams as further reason to scale back ties with the continent. Despite his mildly upbeat tone, Mario Draghi's ECB this month cut the EZ headline interest rate to a record low and latest figures show most of the EZ economies are shrinking. 


Also back on home soil, UK house prices rose the most in six years this month as a shortage of properties boosted values in London. Average values in England and Wales increased over 0.4%, the biggest monthly increase since May 2007. London prices rocketed by an average of 0.9%, whilst demand in the capital has surged 15% in the past 6 months (with supply ironically falling 0.6% in the same period). The credit-easing program by the Bank of England and Her Majesty’s Treasury has helped to ease lending conditions in recent months, whilst Property demand may also be bolstered by plans announced by Chancellor of the Exchequer George Osborne in the budget in March to aid home buyers. His plans have not been met with ample approval however as the latest move, known as Help to Buy, has drawn criticism from the International Monetary Fund, who say there must also be measures to boost the supply of housing. One thing is certain however, UK real estate seems to be back in business, and we hope the one failing PMI sector still acting as a drag on UK growth, construction, should be bolstered by this news. 


Moving to “Eurolund”, Germany's economy barely grew in the first quarter of 2013 as exports and foreign direct investment collapsed. In fact, without the large increase in domestic consumption (helped by a large increase in real wages) which helped offset the declines, the country would have re-entered recession. Gross domestic product rose 0.1% in Q1 2013 against the previous quarter, but contracted 1.4% when compared to a year earlier. It seems therefore that the powerhouse of Europe is set to continue to struggle as we move further into 2013. Despite some reasonably positive indicators, such as the surprise rebound in Business Sentiment and the increase in real wages, Germany will find it tough to survive without its buoyant export sector at full steam. Comparing Germany’s economy with a Porsche 911, without its exports, we have the sleek and expensive sports car shell, with a Ford 1.6 diesel engine under the bonnet! 


Moving to the EEMEA region, The Bank of Israel cut the benchmark lending rate for a second time this month to cap currency gains and spur the economy. The surprise cut came as Governor Stanley Fischer and the monetary policy panel dropped borrowing costs by another 0.25%, leading the central banks interest rate to 1.25%. This now leaves the headline rate at the lowest level in more than three years. The Israeli currency had strengthened by about 6.5% in the six months before the May decision, however has retreated over 2% since the rate reductions. 

GBP This Week

There is very little UK specific data out this week, as is usual during a 4 day working week. We will be watching MPC members Paul Tucker and Charles Bean speak however on Tuesday and Wednesday respectively. Paul will be speaking at the Institute of Government whilst Charles will be at the Official Monetary and Financial Institutions Forum Golden Series Lecture. Later in the week, the only event of any particular impact is Friday’s net lending to individuals which is expected to remain at GBP0.9 billion. However, we would be looking for a highly substantial shift away from that figure to gain any serious traction in the markets in response.


Although the pound had a decent week, it has lost about four cents against the US dollar in May, and the British economy continues to look weak. The pair certainly seemed to have tested and broken the 1.51 line of resistance, and there is definitely more room for the pair to fall further. Against the Euro, Sterling has also suffered considerably, and with very mixed views on both sides of the channel, things continue to look volatile for the pair. 

USD This Week

Monday was also a bank holiday in the US, however in contrast to events across the pond, they have a particularly busy week ahead. We start with the most important release of the week, the second estimate of US Q1 GDP for 2013, which is set to be released on Thursday. This is also the busiest trading day of the week, with unemployment claims and pending home sales also dominating events, so be prepared for some volatility. Starting with GDP, we project it to remain at 2.5%. This comes off the back of the initial release, which disappointed after falling around 0.6% short of the estimates. We will however be following this figure closely to see if there is any upward revision, which will undoubtedly boost the markets. We then move to the weekly unemployment claims figure, which we would normally ignore. However, given the recent unreliability of the ADP non-farm payroll figures as a gauge of the headline non-farm payroll figure, we feel it is worth looking at these weekly claims numbers as a leading indicator of what should come in these later releases. Finally, we move our attention to the pending home sales figure, which is always worth watching as a gauge of economic health. The release has had a tendency to swing from growth to decline on a monthly basis, and given the market forecasts expect an increase from 1.5% to 1.8%, we will be looking for more of a volatile swing.


It is important to remember that figures in the US have improved, and these improvements provide further support for thinning QE sooner rather than later. While the timing remains open, it seems more probable that the next move of the Fed will be to reduce bond buys rather than to increase them. This should act in the Dollars favour, and so we continue to expect the Bulls to ride the greenback for the short term, giving both the Euro and the Pound a hard time to make any sizable gains. 

EUR This Week

Like the UK, the Eurozone is set for another quiet week with Germany dominated many of the economic releases. On Wednesday, the April unemployment change for Germany is expected to maintain at 4,000, signalling a slight rise in the number of unemployed in the country. However, given the recent disappointment in this figure, I would not be surprised to see this also come in above estimates. We then move to Friday and German Retail Sales, which is expected to move back into positive territory after two poor months. The markets are expecting a figure around 0.3% for this month, against a -0.5% release for March. I do believe however that we could see an even more improved figure this time, as this is typically an underestimated gauge of the German economy. Lastly, we will focus on the Eurozone unemployment figure, which is also due on Friday. The markets are expecting a rise from 12.1% to 12.2% this month, which is in line with our own estimates. We continue to view the Eurozone economy as increasingly fragile, and the increase in unemployment in the periphery is likely to continue to add pressure to this indicator.  


With the focus shifting from the Japanese stock market and US quantitative easing, we could now see a return in emphasis on the Eurozone. Currently acting against the Euro are the continued talk of weak GDP numbers, the negative borrowing rates at the ECB and even calls from European leaders to “manage the Euro lower” in a bid to improve exports. Uncertainty remains king over on the continent, and we expect to see continued risk on/risk off trading on the back of the more important economic releases. 

In Other News

 Crystal Palace slammed in a victory against Watford as they finally receive promotion into the Premier League after a 8 year absence. A superb penalty kick into the top corner from Kevin Phillips, won by man of the match Wilfred Zaha, whom was playing his final game before his summer move to Manchester United. In the money crazy world of football, many pundits have speculated that this could be worth up to £120 million to the victors. We would just like to remind them that if they want to buy any foreign players, we are standing ready to help!


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