Spanish Banks get a handout!

Week Commencing Monday 11th June 2012


Overriding Market Themes


The Euro is set to rise for the first time in nearly two months on the back of European aid to the beleaguered Spanish banking sector. The first signs of euro strength ebbed into the markets as Mario Draghi stated that policy makers were ready to act to avoid further destabilisation in Spain, a country which most commentators state as too big to fail. The old mantra of currency trading, it seems, is back in play. The Euro cannot fall forever, and despite the outpouring of bad news from the 17 nation zone, there is bound to be some profit taking at some point. That said, a Greek election is looming and with no guarantees that Hollande can get the Germans to agree to Eurobonds, the future still looks murky.

 

The pound also found the strength to advance, principally against the greenback, as the Bank of England kept its stimulus program and benchmark interest rate level unchanged for the month. Also helping the pound on its way from some of the lowest levels seen this year, was a report showing UK services grew more than projected in May. It is still the view of many in the city that QE will have to rear its ugly head once more, as the old lady sees no alternative to spur growth in the economy. Gilts appear to be rising once again and with a number of data releases this week, the evidence should mount that the country is faltering. 

 

Across the pond, US retail sales seem set to decline for the first time in a year as slower employment and subdued wages dampen demand for automobiles. A projected 0.2 percent decline in May would follow a 0.1 percent gain in April, which was the smallest gain on record this year. With unemployment nearly hitting 8 percent and very limited payroll growth, tough times lie ahead for the American consumer. What does this mean for the economists out there? Well potentially this gives more room for the Federal Reserve to stimulate the economy, especially should the situation in Europe worsen. The so-called “Q3” event seems ever more likely as the Americans desperately try to avoid a double dip recession, which would undoubtly throw the rest of the world in with it.

 

Here is some good news for the motorists among us, oil prices have hit a 17 month low on fears that China’s economy is slowing. Prices of Brent in London dropped to USD 98.06 at the US benchmark also fell 1.4 percent to USD 82 per barrel. This fall comes as traders bet on reduced demand from Chinese factories with the Eurozone problems continuing to add extra pressure. Unfortunately this will not mean cheaper fuel at the pumps, as unfortunately the British Government and Oil Companies tend to take advantage of such drops in oil prices. I can’t blame them, let’s just hope the money goes into projects that help spur on growth within the land, and not to strategically position a duck house on a MP’s lake!

GBP This Week


Most traders that work on UK markets are awaiting Mervyn King’s statement on Thursday while at the Mansion House. I would speculate a more hawkish tone than usual as the need for growth becomes ever more urgent, and perhaps some form of comment on expanding the asset purchasing program. Tuesday’s Manufacturing Production release is the most important data release, with the figure expected to decline to just above flat. Other releases for the week include the RICS House Price Balance and the Trade Balance on Friday. 

 

This should be a bullish week for the Pound against all but the Euro as European leaders continue to increase the positive rhetoric. 

USD This Week


This is a big week for the dollar with US Retail Sales heading the pack on Wednesday. I expect to see a decline in the month-on-month figure to at least -0.1 percent as the American consumer struggles through. Unemployment Claims and Core CPI on Thursday should be reasonably non-eventful, although far from rosy compared with some of their European rivals. The University of Michigan Consumer Statement on Friday should end the week on a low, with a moderate drop in the index of roughly 2 points.

 

The Greenback will likely suffer this week as sentiment returns to the Eurozone amid banking reforms and bailouts. This can only be set to continue should we see further discussion or action in the zone to bolster firewalls against the potential Greek exit in the coming weeks.

EUR This Week


Nothing too important out this week, with a German 10 year bond auction probably being the most important. With the readjustment of projected German GDP I expect to see yield come down and a good turnout. French Industrial Production seems set to be released considerably higher than expected while Euro-wide industrial production seems set to be released considerably lower than expected. Mario Draghi is speaking on Friday, which should round the week off with some significant Euro volatility.

 

On the back of the action the Eurozone leaders took before the end of last week, I think markets are beginning to find reassurance that perhaps the Euro will not fade into the ether.  Should we see continued talk of bank unions or any policies that encompass greater European integration, expect to see some serious Euro gains, especially on EUR/USD and GBP/EUR.

In Other News


It appears there is a football match on during the first half of the week? Roy Hodgson’s England meet the French this evening, and only time will tell who will come out the victors!! I always read bad things about the English team, and certainly it seems the odds are against us tonight, however I cannot help but get this small feeling that the Bulldog spirit will get us through!! My mother always said I was a “dreamer”!! All I know is that England are on a high at the moment, especially after the events of last weekend with the majestic celebrations surrounding the Queens Diamond Jubilee. Come on lads, let’s make June England’s month!

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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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