The G8 states the obvious while German taxpayer fear the worst!

Week commencing Monday 20th May 2012

Overriding Market Themes

The G8 meeting got underway over the weekend, with the Eurozone crisis dominating the talks between the world’s most powerful nations. Both President Obama and David Cameron, alongside other leaders reaffirmed their commitment to the Eurozone, and their desire to see Greece remain within the zone. They also, unsurprisingly as non-European nations continue to struggle with their own problems, stated that Europe was big enough to sort out its own mess. This would have been aimed at German Chancellor Angela Merkel, who has the unfortunate position of running the zones biggest economy. In essence then, the discussion surrounded whether the German taxpayer was prepared to continue propping up peripheral Eurozone countries or not. I am sure this particular question was a pleasure for Mrs Merkel to answer. 


UK Gilts have advanced for the fourth week in a row as deepening turmoil in the Eurozone pushes five and ten year yields to record lows. The Pound however hasn’t fared as well, plummeting against the US Dollar after the Bank of England cut its growth forecasts in its quarterly inflation report, adding to speculation that policy makers will resume their quantitative easing program in the short term in order to boost the economy. The Guv (Mervyn King) said that the UK economy faced threats from the euro regions troubles, adding that we will continue to be subdued until some concessions are reached. 


Over in Greece, the extreme left wing political party Syriza, who looks set to win the next election scheduled in the coming weeks, has stated that if it is elected it wouldn’t automatically mean Greece’s departure from the single currency. The party leader, Alexis Tsipras states that his issue is only with the terms in Greece’s financial aid program, and that by all accounts the Greek people wish to remain part of the struggling currency. He unfortunately doesn’t have to convince the Greek people as much as he needs to convince his European/German paymasters. My fear is that, as the Greeks attempt to find direction, the zone continues to isolate itself from the indebted nation, until at some stage it becomes cheaper and easier to cut ties.

GBP This Week

This week features a busy schedule for Sterling, as we look forward to the MPC minutes on Wednesday. Tuesday however sees the release of UK CPI, which we expect to

post slightly lower than the previous figure of 3.5%. Unfortunately for Mervyn, this means he will have to write a letter to the chancellor! An interesting read I am sure. Public Sector Net Borrowing is also due on Tuesday, showing another reduction in the difference between spending and income for central government


Wednesday sees the MPC minutes and Retail Sales. I don’t expect to see any descent in the committee but I am looking for a reduction in retail sales in line with expectation of roughly -0.7% for the month. The final data release of note is Revised GDP for the quarter, which I expect to remain the same at -0.2%.   


Despite some weak numbers from the UK, the Pound should perform well against its peers as the currency remains a safe haven. I expect Gilt yields to continue to fall and the Pound to remain volatile but strong against the US Dollar, whilst maintaining some momentum against the Euro.

USD This Week

Tuesday sees the release of Existing Home Sales in the US, which I expect to rise slightly as Americans continue to view the property market as under bought. New Home Sales will be released on Wednesday, again showing an increase in building activity spurred by increased buying. Finally, Core Durable Goods Orders and Unemployment Claims are the highlight for the week, and I expect a slight increase in orders coupled with a very slight increase in the number of unemployed in the economy.


The US Dollar should do well against all majors this week as investors seek the security of US treasuries. I don’t expect huge moves against Sterling or the Euro therefore, just heavy upward resistance on all risk on trades.

EUR This Week

This is a very light week for Eurozone data with German IFO Business Confidence being the highlight. I expect a slight drop in confidence over in Europe’s biggest economy and continued economic woes of other member states continue to daunt the massive German industrial base.  


The Euro continues to decline across the board as political uncertainties remain in the forefront of everyone’s mind. I can only speculate that this will continue in the short term unless we see some form of resolution to the Greek problem this week.

In Other News

Good news for Chelsea who managed to win their first champions league final during penalties after a real nail biter of a game in Munich. Obvious commiserations to Tottenham fans, whom seem to dominate this office anyway, who now won’t be able to compete next season. A double blow to Harry, who I am sure would not have minded the top spot in England either. Perhaps more importantly, commiserations to the victims of the horrific earthquake in Italy, as they recover from a 5.1 magnitude quake which struck near Bologna on Saturday. It is such a shame to see such beautiful ancient buildings laying in ruin and I can only hope that, despite the economic woes Italy sees itself in, money can be made available to try and preserve these delicate but fantastic buildings.


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