Spain smashes its budgets as the US storms ahead

Week commencing Monday 2nd April 2012

Overriding Market Themes

Well, European leaders have now managed to commit 1 trillion US Dollars to stem the spread of sovereign debt contagion within the trading bloc, and still they continue to approach the International Monetary Fund for assistance. Germany lead the plea’s to the IMF, insisting that it had committed enough to warrant a further injection and that the international community should now step in to assist. The question these leaders will be asking is why Europe, an economic area representing the largest economy on earth if united, needs international bailout funds or is the Eurozone just trying to share the burden with the less fortunate? 


Spain’s new government has been hard at it slashing public spending wherever it can find it. The government is cutting 27 billion euro’s from its budget this year as part of one of the toughest austerity drives in its history. Spain is often viewed as the next disaster in waiting, and it is not hard to see why. With unemployment teetering above 20 percent and the economy expected to shrink by 1.7 percent this year, things are look pretty gloomy for the zone’s fourth biggest economy. Amongst the key points in the budget, civil servants wages and unemployment benefit were frozen, corporation tax revenue to rise and ministries budgets slashed in half. It really does make being British seem like a walk in the park at the moment.


Across the pond, manufacturing picked up in March, indicating that American manufacturers are weathering the slowdown in global growth. The Institute for Supply Management’s Factory Index climbed 0.6 in February from 52.4 to 53 (anything closing above 50 is considered growth). The increase in automotive sales, as well as sustained purchases of corporate equipment and machinery are stoking the industry that lead the world’s biggest economy out of recession back in 2010. Indeed, the only threat to US manufacturing at present is reduced demand from overseas, although as this only accounts for roughly 12 percent of their output I am struggling to find sympathy for them.

GBP This Week:

Thursday’s Bank of England rate decision and asset purchasing program release is the big one, although no expected changes to the 325 billion pound QE fund or to the headline base rate are expected. The GDP release on Thursday will also catch many traders eye with expectations of growth sitting around 0.1% for March. Also expected on Thursday morning is the Industrial Production figure, which we expect to increase from -3.8 percent to -2.1 percent. Manufacturing Production should drop from 0.3 percent to 0.1 percent for February however.


Whatever has been stoking the pound last week, well I want some! Technically, the pound is relaying on EUR/USD for its upward momentum as fundamentally the macroeconomics simply are not there. We now expect some slight upward movements on cable during the beginning of the week, but with such high levels of dollar longs in the market it is only a matter of time before we see the USD smash its way back up.

USD This Week:

Monday’s ISM Manufacturing release should show a slight increase in manufacturing output stateside whilst Tuesday’s Federal Reserve minutes will be an interesting read. Friday then sees the release of non-farms and the unemployment rate, which we expect to remain relatively flat against previous figures, albeit with a slight drop in the number of non-farm payrolls. 


The Dollar is well overdue a bull run but seems to still be the victim of sentiment as it losses ground against the Euro and Pound last week. We expect this trend to continue with significant levels of support and resistance both on the upside and downside. I think a break at 1.60 could spur GBP/USD to gather support at this level, but can’t see it pushing much higher. USD Buyers should take advantage of these rates as it is uncertain how much longer they will hold.

EUR This Week:

Wednesday’s EZ retail sales figure should come in considerably weaker as the zone continues to wobble on the back of the government’s cost cutting agenda’s. I am anticipating a drop of 1 percent for the year and signalling that Europe’s troubles are far from over. The retail sales release is immediately followed by the European Central Banks rate decision, which is expected to remain flat at 1 percent. The only other release of note is EZ Producer Price Index, however it should come in pretty flat so we don’t expect any volatility.


The Euro will remain range bound against the USD and GBP this coming week. We are looking out for data shocks which could break the significant levels of resistance at the 1.21 and 1.34 levels, however I just don’t think the data releases this week can do it.

In Other News:

This weekend marks the 30 year anniversary of the Falkland Island war between Argentina and the UK. The archipelago in the South Atlantic is now more important than ever, especially with the discovery of massive old reserves under its shores. It is important to remember the men and women that gave their lives for the freedom of the islands, and lets all hope that the diplomatic row between the Brits and the Argentinians takes into account the islanders wishes. On the other side of the world, we all congratulate the recent elections in Burma. I personally never thought that the military junta would allow such an election but it seems that the pro-democracy parties are in line for big victories. 


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