Pound sinks against the Greenback as UK GDP worse than expected
Week Commencing Monday 28th May 2012
Overriding Market Themes
It appears that the UK economy shrank even more than expected, with a contraction in the first three months of the year measuring 0.3%, with the Office of National Statistics figure released initially showing a contraction of 0.2%. This downward revision was due to a larger contraction in construction output than previously expected. The figure was initially estimated as falling by 3%, but transpired to have fallen by 4.8%. All this comes amid a raft of worry in the markets that, the second quarter of the year will also shrink again as the Diamond Jubilee bank holiday reduce output, and puts the new coalition government back in the firing line. Indeed, their job just got considerably harder now that the left have Europe in their grasp! Will their coveted ‘Plan A’ need to be revised? And how much face would that loose in the eyes of Milliband and Balls?
On the back of all this, the pound declined for a fourth week in a row against the US Dollar, which amounts to the longest run of losses since September. Coupled with the revision down of GDP, the markets fuelled speculation that the Bank of England would restart its asset purchasing program to kick-start growth. One element of the UK financial system which continues to defy the odds is the price of Gilts, which continue to advance for a fifth week. The two, five and ten year Gilt yields have dropped to record lows, a continued sign that global investors believe the UK is somewhat shielded from the European troubles.
Spanish bank Bankia has sought a 19 billion Euro bailout from the Spanish Government. The recently nationalised lender has become the latest story from the stricken nation who is widely seen as the next country to require some form of assistance form the EU/IMF contingency fund. It is desperately seeking to bolster its banking system and shore up cash-strapped regional governments as its own assess to markets becomes more and more expensive, with 10 year borrowing costs approaching the 7 percent level.
Over in the United States, job growth will most likely pick up in May after the weakest gain in six months. The US unemployment rate has held at a three year low as signs of a gradual improvement in the labour market continue to ebb into the mainstream media. With a jobless rate of just over 8%, it is not exactly a bed of roses, but when you compare this to Spain’s unbelievable 23% then it is easy to see why investors still favour the greenback against other developed nations.
Finally, the European Union has filed a lawsuit against Argentina, in response to the shock nationalisation of YPF by the Argentine government, which was majority owned by Spanish petrochemical giant Repsol. The European Union highlights difficulties in getting export licenses as well as rules forcing companies to import as much as they export, all of which they claim to give Argentina an unfair advantage within their domestic market. It is highly unlikely that this situation will be resolved, but it does pose a more interesting question, is protectionism back? As the global economy continued to face increasingly tough times, governments are turning to trade and protectionism to gather support domestically. At the moment only the ‘smaller’ economies have such policies, but if we continue to see a deterioration of the global economic climate don’t be surprised if the Government start hammering import duty on your favourite Argentinian wine in favour of a good old fashioned English bitter.
GBP This Week
Friday’s Manufacturing PMI is the highlight of the week, with market expectations to show a very slight contraction in May’s manufacturing compared with the previous slight expansion in Aprils PMI. Other notable releases are the CBI Realized Sales release on Tuesday, which surveys about 160 retailers asking them to rate the relative level of current sales volume. I expect this to post a further negative figure which will likely be worse than April. Halifax and Nationwide HPI are also due at the end of the week, which should show some slight pickup in the housing market as British Banks make use of their consolidated balance sheets.
Sterling should continue to hover around the 1.25 mark on GBP/EUR as markets continue to see what is to happen in the Eurozone, perhaps with a tendency for Euro strength as the pair continues to struggle to break through 1.26. Cable should see some minor gains as confidence ebbs back into the markets as Eurozone leaders continue to draft up emergency plans should Greece leave the Eurozone. I expect continued volatility however, and directionally it could be anyone’s game as we build up the that crucial Greek election.
USD This Week
Friday’s Non-Farm employment change and unemployment rate should be the biggest news of the week, although with very little change priced in the market I doubt it will be the most exciting release ever. Forecasters believe that unemployment is likely to remain at roughly 8.1% and no-farms to increase from 115k to 152k. Preliminary GDP for the quarter should show that the US is storming ahead of its European rivals with a growth rate of 1.9% while Consumer Confidence is set for a marginal rise from 69.2 to 69.6.
The greenback will likely give up some ground this week as investors seek the high returns of their European cousins, however the flow will more likely be a trickle not an exodus so expect any dollar losses to be sluggish at best.
EUR This Week
This should be a quiet week for the Eurozone with regards to economic data, with the Italian 10 year bond auction possibly being the highlight. I expect to see an increase in the cost of borrowing for the Italian government as investors continue to move capital away from the periphery into the northern European economies of France and Germany. Perhaps more importantly however, I am concentrating on the results of the Irish Stability Treaty Vote on Thursday. Ireland will vote on a referendum on whether to accept or reject the European Union’s Stability Treats, with the result likely to be projected before the official vote count based on early vote counts and exit polls. The Yes campaign continues to lead, however the outcome is still in the hands of the undecided voters.
As usual, political statements and sentiment continues to outweigh economic data. Continue to watch the debates across the zone as to whether Germany will underwrite the idea of a Eurobond and whether the Irish will vote against the treaty. Greek voter sentiment also continues to weigh heavily on the zone, so expect to see some additional sentiment flows should polling continue to favour the far left in the upcoming Greek election.
In Other News
Mark Webber won the Monaco Grand Prix for the second time in three years as the gem in the motor sport calendar comes to an end. The Red Bull driver led from the start and controlled the race as Nico Rosberg sought just a single mistake from the Australian pro. The ever faithful Brit, Louis Hamilton came fifth unfortunately and stands at 4th place in the Formula One Standings. It’s not all celebrations however in Greece, where the head of the IMF Christine Lagarde accused them as a country full of systemic tax evaders. Unfortunately for the Greeks, they don’t have the best reputation in the world as being diligent tax payers. I can only imagine this situation getting worse too as regular Greeks continue to tighten their belts as unemployment bites.
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