Sterling enters earth orbit as the Eurozone crumbles!
Week Commencing Monday 14th May 2012
Overriding Market Themes
The Euro continued to decline against the greenback for a second week, reaching a 3 month low on the world’s most liquid currency pair. Concerns have mounted throughout the world as Greek politicians struggle to find consensus and form a coalition government, and speculation of the nation’s departure from the Euro mounts. The dollar gained against all its peers whilst the Japanese Yen rose against everything other than the greenback as investors scrambled to find safe havens for their capital. The elections in Greece and France have left an air of uncertainty in the Eurozone, especially on the future of austerity measures within these nations. Does this mark the beginning of the Drachma and what will happen to Greece should it leave? Watch this space!
Back on home soil, 10 year Gilts have advanced for the third week running as European debt woes continue to push investors to the relative safety of UK Government Debt. While Gilts yields were dropping, the pound was rocketing against the Euro for the fourth week running, reaching a three and a half year high at the 1.25 mark. This comes as the Bank of England halted its quantitative easing program at 325 billion pounds on concerns of accelerating inflationary pressures within the economy. It is not all rosy over in dear old England however; with the UK suffering from its first double dip recession since 1975 and the pro-austerity coalition battering in the local elections, Britain’s economic wellbeing is constantly in doubt.
China has cut the amount of funds its banks need to hold in reserve, in a bid to boost their economy. This follows a report showing the Chinese economy has begun to slow, with industrial output slowing to the lowest rate since 2009. This fresh bid to boost the amount of lending in the economy comes as Chinese leaders launch a fresh bid to create a free trade pact with Japan and South Korea, both of whom are China’s most important trading partner. China continues to enjoy high demand from both Europe and North America despite high commodity prices, but as austerity bites in Europe I expect to hear more sob stories from the sleeping giant of the east.
The JPMorgan Chase & Co trading position story is really hammering financials stateside as the SEC (The American variant of the Financial Services Authority) indicating that they are preparing an investigation into how a trader lost 2 billion US Dollars. The trader known as the ‘London Whale’ dealt in the Credit Default Swap market, an instrument which traders use to underwrite default risks in and then market with a premium. Last week, JPMorgan lost 13 billion US Dollars of its value on the New York Stock Exchange and Fitch, the global credit agency dropped is credit rating from A- to AA-. Not a good week to be a banker I guess.
Remember, Friday is the start of this year’s G8 Meeting in Chicago, and I would imagine the Eurozone crises will dominate the proceedings. This could impact the markets on Friday, although I would speculate the real moves will be felt on Monday next week.
GBP This Week
Wednesday is a big day for Sterling as Bank of England Governor Mervyn King speaks about the inflation report. We usually see some volatility around these speeches as traders try to decipher interest rate clues; however I think they will be disappointed with the usual dovish response he dishes out to the financial markets. Inflation itself should show very little sign of slowing down as commodity prices continue to keep prices elevated for the short term. The only other news release of note is the Claimant Count Change release, also on Wednesday morning. I expect to see a slight increase in the number of people seeking benefits, albeit in line with market expectations at roughly 4,900. Finally, watch out for movements on the back of discussions during this week’s G8 Meeting in Chicago.
Sterling has hit some big technical and psychological milestones last week against the Euro, so be wary of seeking further bullish moves on GBP/EUR unless something drastic happens on the continent. GBP/USD will continue to be put under pressure against the greenback as investors move capital away from Europe into the relative safety of the Japanese Yen and Dollar.
USD This Week
Core CPI and US Retail Sales are the highlight of Tuesday’s data releases, with retail sales expected to decline after the Easter festivities last month. Although I do expect it to decline slightly, it will still be considerably better than their European peers, so it is likely encourage further dollar gains. On Wednesday we see the FOMC Minutes and Building Permits, where we expect to see a slight decline in the number of new residential building permits being issued. Unemployment Claims is out of Thursday, with a small rise in the number of unemployed persons likely.
With all this uncertainty in the markets around the Eurozone, it should be a good week for the US Dollar.
EUR This Week
This is a very quiet data week from Europe with German ZER Economic Sentiment being the only release of note. Sentiment can only go one way when a socialist anti-austerity president has been elected in France and Greece looks likely to exit the Euro!
The main focus in the zone is now political, therefore we will continue to monitor efforts in Greece to arrange a new election and see how opinion polls rate the extremist parties. A meeting between Hollande and Merkel seems extremely likely in the coming days also, how far will the new French President-Elect be able to twist the iron lady’s arm?
In Other News
What a premier league final, and obviously congratulation to Manchester City for their victory, which is 44 years in the making. My real applause goes to Queens Park Rangers however in an almost herculean effort to put City to sleep. Commiserations to Manchester United fans too, who despite a glorious win against Sunderland could not seize the title this time. There is always next year Rooney!! Another set of congratulation goes to Ashleigh and Pudsey, who won ITV’s Britain’s Got Talent and a rather smashing £500,000 prize. Pudsey is certainly more energetic than my West Highland Terrier, who just about managed to jump of the bed for a turkey dinner yesterday evening. It’s a hard life, but something has to do it.
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