Osborne's budget for business! Lets just hope Dorothy doesn't mind too much!
Week commencing Monday 26th March 2012
Overriding Market Themes
The Euro gained for most of last week on prospects that Europe may agree to combine their two rescue funds to help contain the spread of its sovereign debt crises. This, coupled with one of the highest German business confidence figures since the middle of 2011 really placed other majors on the back foot. All this is stoking the fire of European recovery, and with European policy makers continuing to discuss the creation of a permanent 500 billion Euro stability mechanism, we feel this could only just be the beginning of a turnaround in the trading bloc.
Back home, the government are continuing to suffer backlash over its budget, seen by many as helping the bankers whilst hurting the pensioners. My view, at least my economic view, is somewhat different however. This budget was a budget for business and supports what business does best, innovation. We can all acknowledge that Britain is not Germany, and although we possess a large manufacturing sector, it is rather lacking when coming to the more ‘high value’ items. What we do have is a penchant for Financial Services and luring foreign investment to our shores, in short exploiting globalisation.
It is worth remembering that in budget such as these, there a rarely any winners! The chancellor is gambling on business picking up the growth that capital spending lead for so many years under labour. It’s a tall order and certainly won’t happen overnight, but setting this ball in motion can only be a good thing in the long run. Maybe not for David Cameron though, who according to a recent ICM poll has been overtaken by Ed Miliband by 1 point as a result of a public opinion shift post-budget.
More globally, are we seeing the return of the carry trade? We certainly don’t see why not. With lower volatility and record low interest rates both in the UK, Europe and US, are traders searching for returns as far flung as Nigeria and Kazakhstan. Investors seem to be pouring cash into commodity rich countries or countries with very high rates of growth after the European debt crises forced them into the safety of the greenback and JPY back in 2011. I feel this will become more and more common as G10 countries look to intervene in their respective currencies to protect exports, and so they should, but as currency traders get bored we expect to see some exotic crosses being tweeted on a trader board near you.
GBP This Week
Tuesday sees the release of the Nationwide House Prices survey, which we expect to come out flat against its previous figure of 0.9% for the year. More importantly, Wednesday’s GDP release in the morning should confirm that the UK entered a period of negative growth in the fourth quarter of 2011, with growth down by 0.2%. This should lead to an annual growth figure of 0.7% for the year. We expect the current account deficit to be almost halved however and a slight increase in total business investment. Finally, Thursday we are watching the February’s mortgage approval figures, which is expected to come out slightly lower than January, principally because it was a short month.
We are still GBP negative this week as the Euro and USD consolidate their modest gains and continue to trend downwards. I will be watching the GDP figures this week, as they pose the currencies best chance to reverse some of the losses it suffered last week.
USD This Week
Wednesday’s Durable Goods Orders kick-off off the US data round this week, with a large increase expected to be posted. Thursday sees the US release their GDP figures, which should show a US growth of 3% over 2011, and 0.9% in the last quarter. These are amazing growth figures and really illustrate how much the European sovereign debt crises is weighing down on UK growth potentials. Finally, I am waiting to see what the University of Michigan confidence report for March says. I am expecting it to publish slightly higher than previously, continuing to stoke the Dollar bulls.
EUR This Week
After some minor data releases on Tuesday, we are waiting for the German CPI release on midday Wednesday. I expect the EU wide figure (the figure harmonised with the rest of the Eurozone) to post slightly lower, whilst the German wide figure to post slightly higher. The shifts should be reasonably small so I don’t expect to see much volatility as a result. Thursday’s consumer, economic, business and industrial confidence figures for the quarter should close out roughly in line with expectations, with perhaps the exception being services which I expect to become slightly more optimistic than before. Finally, German retail sales on Friday should post positive at just above flat.
In Other News
James Cameron has gone from ordering around blue people to diving to the deepest place in the ocean! In a part privately funded expedition, the famous film director plunged nearly 11km down into the Mariana Trench, the deepest underwater trench in the world. Why would you put yourself into such a situation I as you? Well, if your answer is ‘why not’, then your certainly in my awe. David Cameron might well wish to join James Cameron down their though, as he struggles to avoid spilling the beans on who he has invited to a dinner at number 10! All we can say it that we aren’t on the guest list, and have had to make do with a sausage and mash at Frankie & Benny’s in Redhill! How the other half live hey!
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