The German's forget their pound of flesh ... Pinch me, I must be dreaming!

Week commencing Monday 3rd December 2012

Overriding Market Themes

The US seems to show no sign of slowing down, as its economy grew at an annualised rate of 2.7% in the third quarter of the year. The figure is significantly higher than the 2% figure projected by the Commerce Department, and chiefly down to companies rebuilding their inventories. This revised figure confirms many analysts suspicions that the nearly 10% jump in federal spending has played an important role in the countries recent good fortunes, and that the fundamentals are simply not there, as this level of government investment is unsustainable. Other factors that boosted growth included the continued rise in consumer spending, stronger exports, and a slight rebound in homebuilding activity from historically low levels. It seems set that 2012 will be a good year for the cousins; however with the Fiscal Cliff approaching, and a much divided Senate, will it be a good 2013?


Back on home soil, former Bank of England policy maker Adam Posen believes that the new team at the Bank are likely to refrain indefinitely from further asset purchases as they doubt the effectiveness of the program.  The Bank, soon to the overseen by Canadian Mark Carney from the middle of next year, has been engaged in a series of bond purchases under its Quantitative Easing system, which many analysts speculate has done little to save the economy to disaster. It seems that the previous champion of QE has gone off the idea, stating that instead credit boosting schemes may well be the way forward. I don’t think it has done him many favours, with the Deputy Governor Paul Tucker calling his statements ‘bizarre’. In our mind, QE has had almost little to no effect on inflation, therefore stopping the program seems counter production, at least in the short term. It is however, not Mr Posen’s or Mr Tucker’s decision to make for long, so I wonder how our new Governor will handle the ship? The printers are set to churn, but is there something more exciting up his sleeve?


Making sure that the Bank of England gets even more press, Sir Mervyn said during a press conference that UK banks may need to raise more capital to protect themselves against future losses. Specifically, banks may be underestimating the extent that credit losses may impact their balance sheets, whilst also still having unknown costs of past failures which may not have been full disclosed. There is also a big argument stating that the ratio’s which the FSA demand banks adhere too when calculating their capital requirements may be too optimistic. This comes as banks are being hammered to cover claims for payment protection insurance (PPI) mis-selling, not to mention LIBOR rate fixing. All in all, financial stocks still seem in reasonably good shape, especially when compared to banks on the continent, however inadequately capitalised banks hold back economic recovery and undermine investor confidence. This is something the Bank will wish to correct swiftly, so expect the ‘old lady’ to flex her muscle on this as we move into the New Year.


Chancellor Angela Merkel opened the possibility that Germany may accept a write-off of Greek debt, as policy makers this week attempt to engineer a buyback that’s crucial for Greece to receive more funding. This vast shift in attitude towards Greece’s mounting indebtedness, which triggered Europe’s debt crisis three years ago, signals a growing consensus that a Greek exit would doom the 17-member single currency to the history books. Last week’s agreement by European law makers to give Greece more time to meets its debt targets helped ease concerns over the crisis, and gave the Euro the impetus it needed to regain momentum against a strong Pound and Dollar. 

GBP This Week

We kick start the week with Manufacturing PMI, which is expected to come in at around the 48.1 mark against a previous figure of 47.5, signalling that manufacturing is still performing relatively strongly and optimistically in the UK. This is followed by Construction PMI on Tuesday, which should come in roughly flat against its previous release. Finally for the PMI sets, Wednesday sees the Services survey release, which should also show a sizable increase in confidence in the sector. Thursday is the highlight, with the Bank of England’s Rate and QE Statement. I do not expect any shift in either rate or QE, although the member’s comments will be an interesting read. Friday sees the last data release of note, with Manufacturing Production out in the morning. I expect this to decline -0.2% against the 0.1% increase posted last month. I doubt this will cause too much disruption in either GBP/USD or GBP/EUR, as forecasts still show UK manufacturing outperforming its peers in Europe for the short to medium term.   

USD This Week

Monday’s ISM Manufacturing PMI kick-offs the week, although no change in this figure is expected so expect a quiet Monday afternoon. Wednesday we see ADP Non-Farm Employment Change and ISM Non-Manufacturing PMI, with the former looking set to post a decline in the number of employed people during the previous month. ISM should come in above the 50 mark at 53.8, signalling that companies remain reasonably confident in the US economy and its ability to grow. Thursday sees the release of Unemployment Claims, with the number of individuals who filed for unemployment insurance for the first time during the past week likely to drop to 381,000 from 393,000. Finally, Friday’s Unemployment Rate and Preliminary University of Michigan Consumer Sentiment releases end the week should go without incident. I expect Unemployment to remain steady at 7.9% whilst UoM to decline -0.6 to 82.1, still showing that US companies remain bullish on consumer sentiment moving into the New Year. I expect the Dollar to have a hard week, especially in the absence of some jaw dropping data this week. 

EUR This Week

This is a relatively quiet week for the Eurozone, with the Spanish 10 year bond auction on Wednesday perhaps headlining the show. I expect yields to settle around the 5.5% mark, indicating investors renewed confidence in the zone and Spain’s funding ability. We also have Spanish Unemployment Claims to look forward too on Tuesday, which I expect to come in slightly higher than before at around 129.5k. On Thursday, the ECB is joining the Bank of England in releasing its base interest rate for the month, which should remain unchanged at 0.75%. The ECB press conference and Mario Draghi’s speech to the Anchor Conference on Friday should interesting, and traders will no doubt continue to seek hints in his speech of further advances of the ECB’s mandate. 

In Other News

It seems the great British public has made Starbucks finally go to HMRC to discuss its tax affairs. It was one of several well-known firms that were criticised over the level of their corporation tax payments, with the firm finally admitting that it needed to do more in the UK on tax. I think everyone can appreciate that a big global company like Starbucks has complicated tax strategies; however to not pay a single pound in taxes is a little immoral, even for an ex-banker like me! Indeed, George Osbourne is finding it tough enough without big multinationals shying away from the tax man, having admitted that curbing the UK’s financial deficit is taking longer than planned.   


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