Japan feels the pain as Olympic fever hits London

Week Commencing Monday 30th July 2012

Overriding Market Themes

Industrial production in Japan fell unexpectedly for the third straight month, stoking fears that the economy is losing momentum. Factory output fell 0.1% against the previous month’s figures, following a 3.4% decline in May. The data comes as demand continues to weaken for Japanese products, specifically in the Machinery, Iron and Steel sectors. The central bank and government authorities confirmed the decline, stating that the economy was still recovering from last year’s earthquake and tsunami, which caused considerable damage to factory production.


German Chancellor Angela Merkel and Italian Prime Minister Mario Monti have reaffirmed their commitment to the Euro, stating that they will do everything possible to protect the single currency. The comments follow the remarks from the French President Francois Hollande and ECB President Mario Draghi. It seems that good news from the continent these days comes in the form of grandiose political statements, and we have all heard this before. What these statements have done though is increase speculation that the ECB could resume its programme of buying up Spanish bonds, a scheme that will help lower the countries skyward sovereign bond yields. 


In more news about Spain, the economy shrank 0.4% as their recession deepens in the second quarter. This coupled with the 0.3% contraction in Gross Domestic Product in the first three months of the year leave the Eurozone’s fourth biggest economy in a considerable pickle. Spain currently paid a record 7.5% last week on fears that it may find it difficult to repay its international debts, prompting Euro group leader Jean-Claude Juncker has called for the European Central Bank to act to cut Spain’s debt costs. This Thursday, the ECB will announce its latest decision on both its interest rates and whether they are restarting its bond buying programme, known as the Securities Markets Programme (SMP). Under the SMP, the ECB buys government debt directly from the banks on the commercial market, therefore helping to bring down the cost of borrowing for governments without the central bank having to lend to them directly.


Finally, in good old England, Prime Minister David Cameron has defended the UK’s economic policies, saying the government has acted decisively to restore confidents in its public finances. Speaking at a Olympic investment event, where ministers hope to generate GBP 1 billion of UK deals, he said that the games were value for money, and that the Olympics and legacy projects could generate around GBP 13 billion for the UK economy over the next 10 years. This all comes as the UK economy shrank by a whopping 0.7% between April and June this year, adding fuel to the fire that the government is cutting too fast. Most major economists believe that the economy will rebound in the second half of the year, especially as the Olympic tourism and spending boost filters in, however I doubt that we will be winning any economic medals for some years to come.

GBP This Week

This should be a big week for Sterling as we start with Manufacturing PMI on Wednesday. I expect the figure to come in pretty flat against the previous result of 48.6, confirming that manufacturing is still weathering the storm reasonably well compared to the other sectors within the economy.  Construction PMI is then released on Thursday, which I expect to decline somewhat from previous figures. Heading the pack is the Bank of England’s Interest Rate decision and Asset Purchasing Facility statement. I don’t expect any movement on either this month; however we will be watching the voting to see if further QU is still on their minds. We end the week with Services PMI, which should expand slightly in line with expectations.

USD This Week

CB Consumer Confidence starts the week off, with a slight decline in confidence within the US economy moving into August. We then look forward to ADP Non-Farm, Employment Change on Wednesday afternoon, which details the estimated change in the number of employed people during the previous month, excluding the farming industry and government. I expect the number of employed to continue to climb, although at a considerably slower pace than previously indicated in June. ISM Manufacturing will likely come in slightly better than expected and to finish Wednesday; the FOMC Statement is likely to cause volatility. Unemployment Claims is also out on Thursday, which I expect to increase slightly over the month by roughly 25,000. To finish off the week, we have the Unemployment Rate and ISM Non-Manufacturing PMI, both of which should come in flat as a pancake.

EUR This Week

This morning saw Spanish Flash GDP, which was confirmed in at -0.4% for the quarter, after which we are watching an Italian 10 year Bond auction. We then move to Wednesday, when we await Spanish Manufacturing PMI, which is also likely to come in flat against the previous release. The highlight of the week will be the European Central Bank Interest Rate decision on Thursday, as well as the proceeding press conference. As usual however, political sentiment outweighs economic data, so continue to watch closely any political developments, as well as the ECB press conference which is likely to cause some considerable volatility into the end of the week.

In Other News

The opening ceremony of the London games was absolutely spectacular, and although I am sure it was not everyone’s cup of tea, I for one felt very proud to be British. The big question was whether it was going to be bigger and better than the games 4 years ago in Beijing, and I think they managed too. Perhaps it was not as brash and spectacular, but it felt human and had that eccentric British charm to it. I never professed to be a big lover of the Olympics, but now that it has come back to the UK I feel that I have a second wind for the sports. NU Currencies wish team GB all the best, and fingers crossed plenty of gold will be adorning our athletes to come.


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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