Spain in the spotlight again whilst the UK continues to fly!
Week Commencing Monday 16th April 2012
Overriding Market Themes
The cost of insuring against a Spanish default has risen to an all-time record last week, as the newly elected Prime Minister tries to prevent the nation becoming the fourth European state to require a bailout. Spanish Credit Default Swaps jumped 17 basis points to 498 in London, sparking panic for international investors that had found a new wave of European confidence in their portfolio’s over the past months. Spain is already announcing some pretty tough austerity measures, including a massively unpopular crackdown on tax fraud, a problem the Spanish, Italians and Greeks all share collectively.
Ratings agency Standard & Poors reaffirmed its AAA rating for the UK last week, saying it believes the economy is “wealthy, open and diverse”. It also confirmed that its outlook for the UK Economy is stable, as compared with its two counterpart agencies that both have the UK on negative outlook. This comes as the UK governments harsh budget busting measures begin to take effect and people begin to feel the bite of additional taxes on products. The agency’s outlook for the coming years forecasts the UK’s debt burden peaking in 2013 at around 87% of Gross Domestic Product, then declining sharply in line with the government’s fiscal deadlines.
Across the pond, Tim Geithner has warned Congress not to repeat last years bungled debate over the debt limit whilst reassuring the house that the US economy is stronger than it has been for years. The debate about the debt ceiling last year saw a divided debate lasting a little over a month, and caused a considerable drop in confidence in the US political system. His statement comes as US employers add an extra 120 thousand jobs to the US economy in March and retail sales continues to remain buoyant. It seems that despite a steep climb in oil prices and continued problems in the Eurozone, the American people endure and show no sign of slowing the spending of their hard earned buck!
GBP This Week
Tuesday’s CPI and Core CPI releases should show no discernible change in the level of inflation, with perhaps a minor drop in Core CPI for the year. These releases should be dwarfed by the Bank of England minutes, due to be released on Wednesday and the jobless claims survey for March. We do not expect any rate changes this month, it will be interesting to see if they continue to view the risks of inflation to remain significant. It is also unlikely that the bank will look to increase its asset purchasing program, as the global recovery continues to help the UK stay out of recession.
Jobless claims could be the big one of the week. We expect claims to drop just over a thousand over the month, but would not be surprised if this figure were even greater. Expect some bulls to get behind Sterling should this happen.
USD This Week
Monday’s advanced retail sales report is the highlight of the US calendar this week, with a somewhat depressed market expecting it to close at 0.4% as compared with last month’s 1.1% post which took the market by storm. Friday’s meeting in Washington of the G-20’s finance ministers and Central Bankers will be interesting. We expect to hear some harsh words from the US, UK and BRIC countries about European responsiveness, and as such expect to see some dollar buying in the European afternoon session as traders hedge against another pessimistic Bernanke speech.
EUR This Week
Eurozone CPI should be dwarfed by the German ZEW survey release on Tuesday. We expect the CPI figures to remain reasonably stable and the ZEW report to show a slight decline in confidence in Europe’s powerhouse. German Producer Prices report on Friday will round the week off with a marginal drop in the cost of input commodities.
Sovereign debt and economic performance continues to dominate news feeds, therefore we believe that EUR data releases will have a marginally smaller impact of currency markets than their UK and US counterparts. We continue to watch Spanish, Portuguese and Italian debt yields and CDS prices, as these continue to act as a medium term barometer of European stability.
In Other News
Last week marked the 100th anniversary of the Titanic disaster, as has been commemorated around the world as relatives and fanatics alike all remember those who died. 1,500 people died as the ‘unsinkable’ ship steamed into an iceberg, and now rest roughly 45 miles from its final destination of New York. In sport, Spurs were crushed by opponents Chelsea in the FA cup semi-final by 5 goals to 1 in what can only be described as an emphatic win for Roberto di Matteo and his squad. Lampards spectacular free kick from 30 yards shows that a footballer can mature with age. I do however feel slightly wretched for Tottenham, who did fall foul of a wrongly awarded Mata a goal. I am sure that Redknapp won’t be too disappointed when he lands that England job eh!
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