The European Central Bank buys bonds ... again!
Week commencing Monday 10th September 2012
Overriding Market Themes
Chinese exports grew less than forecasted and imports fell in August, adding to fears that the far eastern giant is aiming for a hard landing. Exports rose by 2.7% from a year earlier, whilst imports fell by 2.6% from a year ago, indicating a decline in domestic consumption. China has been struggling in recent months as its export led economy has been hit hard by the slowdown in international demand for Chinese products, but what is even more alarming is the drop in imports, which I doubt the government saw coming. It is the quintessential double edged sword, as exports decline, manufacturing declines, which leave the Chinese population with less money to spend on expensive European and US imports. Who said China was immune to all the global troubles?
The European Central Bank is continuing its bond buying plans, giving the euro a much needed breathe of life. The single currency rose 0.3% to 1.2673 on EUR/USD on Friday whilst Sterling is approaching 1.25. On the yield side, both Spanish and Italian 10 year bonds fell further, easing the implied cost of borrowing for the debt laden countries. Spanish bonds fell to 5.77%, below the critical 6% level for the first time since May, while Italian bonds fell to 5.19%. On Thursday, ECB president Mario Draghi unveiled details of the bond purchasing plan, where the ECB agrees to buy a potentially unlimited amount of bonds from Eurozone members on the condition that these countries make a formal request for bailout funds, and stick to the terms of any deal made.
The OECD has cut its UK economic growth forecast, and project that the economy is set to contract by 0.7% this year. This is a sharp revision from their previous projection, where they forecasted growth of 0.5%. The OECD also cut growth forecasts for other developed economies, stating that the Eurozone debt crisis poses more severe risks to global growth than previously thought. Outside Europe, the US, Canada and Japan seem set to grow this year.
GBP This Week
The only release of note this week is the Claimant Count Change, which I expect to increase by 0.1k against a previous contraction of 5.9k. This would indicate that the number of people claiming unemployment benefit has increased very slightly over the month, although the change is so small that I doubt it will cause any real movements in currency markets. The main focus for Sterling this week is embedded in USD data, so it should continue to benefit from Risk On trading should the releases be positive. We also have a 10 year bond auction in the UK, where I expect yields to fall around a rather tasty 1.72%.
USD This Week
This should be a big week for the Dollar as we kick off with Tuesday’s Trade Balance, which I expect to come in roughly -44Billion against a -43billion release last month. Moving to Thursday, we have Unemployment Claims and PPI for the month, both of which are likely to cause significant volatility in the markets. I expect unemployment to remain reasonably flat, perhaps revised slightly up from last month, although PPI should come in around 1.2%, illustrating a pickup in inflationary pressures against manufacturers. In the afternoon we have the FOMC Statements, which should provide a good indication on the economic health of the US. Moving into Friday, we have Core CPI, Retail Sales and the University of Michigan Consumer Statement. I don’t expect anything majorly abnormal from these statements, although being the end of the week it should set the direction for Monday week.
EUR This Week
Much like Sterling, this week is rather light on EUR data, with the Italian 10 year bond auction heading up the releases. I expect yields to come in around 5.8% for this round, although it is possible that we could see yields as low as 5.5%, signalling an end to the unrealistic borrowing rates of 6% which have plagued the economy for months.
In Other News
Yesterday marked the end of the Paralympic games in London, and the end of the Olympic dream which has encompassed the country. I must confess I have really enjoyed the games, and am sad to see them go, although I am already looking at flights to Rio in 4 years’ time. Also, congratulations to England who smash Moldova 5-0 on Friday! It was not the hardest match of the all, but we will take all the successes we can get.
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