Italy gets stung again as the UK sees the green shoots!

Week Commencing Monday 16th July 2012

Overriding Market Themes

Moody’s has cut Italy’s credit rating and warned that the country was likely to see a sharp rise in borrowing costs. The rating drop, down two notches from A3 to Baa2, puts Italy just 2 levels above junk status. The move also sparked concerns of contagion risk from Spain, Portugal and Greece, pushed Italian bank shares down and kept the Euro depressed around a 2 year low. The downgrade is unlikely to inspire Italians to believe that Mario Monti’s massive economic and social cuts are the way forward, and come as the Germans demand even more action. The saying between a rock and a hard place seems to spring to mind.


It seems that even the great Chinese dragon cannot help but slow down amid these turbulent economic times. Chinese economic growth slowed to 7.6 percent in the second quarter as compared with the same period a year ago. China now accounts for nearly a fifth of the world’s total economic output, and therefore any slowdown may hamper a global recovery. More regionally, many of the other emerging Asian economies are becoming increasingly reliant on China as a trading partner. The view that China is in line for a hard landing maybe premature, but a drop of this magnitude seems hardly likely to slam us all back into the dark ages. 


I thought it would be a good idea to end this section of the report with something positive, and what could be better that speculation the UK economy could return to growth in the second half of the year. Falling inflation and a pickup in consumer confidence will help the UK storm back into growth, according to the Item Club or Independent Treasury Economic Model club. They say the economy will grow by 1.6 percent in 2013 and 2.6 percent in 2014. I admit, rather depressing figures when you compared

them to the Chinese, but growth is growth.

GBP This Week

CPI starts off the week with its release on Tuesday, which I expect a small contraction of 2.7 percent. Mervyn King is also due to speak on Tuesday, alongside Paul Tucker on the June 2012 Financial Stability Report before the Parliaments Treasury Select Committee. Claimant Count and the MPC Meeting Minutes are due out on Wednesday whilst Retail Sales takes the lime light on Thursday. I do expect a contraction in Retail Sales; however it should still find itself in positive territory.

USD This Week

This is a massive weak for the dollar, with Retail Sales heading the curve on Monday. I expect growth of roughly 0.1% on both the Core and regular release. Core CPI is due on Tuesday, which should come in flat as a pancake; although Ben Bernanke is due to testify on the semi-annual monetary policy report. Moving to Wednesday, Building Permits should come in reasonably flat again, whilst Ben Bernanke continue to testify for a second day. We finish the week with Unemployment Claims, which will likely rise slightly to 370k and the Existing Home Sales release. 

EUR This Week

There is nothing really out from the Eurozone apart from German ZEW Economic Sentiment, which I expect to be a non-mover. The main concern for the zone moving into the week is political risk, so we continue to watch the news wires for further developments in the relationship between nation states and the grand European bodies tasked with protecting their economic systems.

In Other News

It seems that the conflict in Syria is set to continue as reports of heavy fighting in Damascus overshadows the efforts made by the UN and Arab League. Mortar and small arms fire was reported in several areas as government forces clash with the Free Syrian Army, a situation which the International Red Cross regards as a civil war. No doubt Hillary Clinton will be attempting to raise some support for a tougher stance from the new Egyptian Prime Minister.  


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