UK avoids the bullet as France and Spain join the dole queue!

Week Commencing Monday 29th April 2013

Overriding Market Themes

The UK has avoided falling into a triple dip recession after recording faster than expected growth in the first three months of the year. The ONS’s GDP figures showed the economy grew 0.3% during the first quarter of 2013, a figure far higher than many market analysts projected. Sterling strengthened versus all except one of its 16 major counterparts on the back of the news, whilst Chancellor George Osborne said the data was an encouraging sign the economy is improving. The pound advanced 1.6% during the week to $1.5489 against the Dollar whilst against the Euro it appreciated 1.8%, trading at 84.11 pence per euro. Next on the UK’s agenda is the Bank of England, which meets on May 8th to the 9th amid a policy maker split on whether to extend the 375 billion-pound ($581 billion) asset-purchase program, which tends to devalue the currency. The GDP release has however, in our eyes, dampened speculation that the bank will boost stimulus.

Across the channel, the number of unemployed people in France rose to a fresh high last month. The new high shows that 3.2 million people are seeking work in France, 11.5% more than a year ago and 1.2% more than in February. The Eurozone’s second biggest economy seems set to be plagued by the grave economic problems facing the region, and comes as Spain reported record unemployment amid its continuing recession. Spanish unemployment figures now show that 27.2% of the workforce is seeking employment, taking the total number of unemployed people past the 6 million mark. As if things could not get worse for the Zones fourth biggest economy, the Spanish government also revised down its forecast for growth, citing that the level of contraction is likely to be worse than previously predicted. Madrid now expects the economy to grow by -1.3% in 2013, compared with its earlier estimate of -0.5%.

In further growth news, the US economy grew at an annual rate of 2.5% in the first three months of the year, helped by the strongest consumer spending figures in two years. Although growth figures were lower than many analysts expected, it was better than the 0.4% rate recorded in the final quarter of last year. Within the figures, it was noted that consumer spending rose at an annualised rate of 3.2% whilst government spending, especially defence spending, fell at a rate of 4.1%. Thankfully for the cousins, consumer spending accounts for more than 70% of US economic activity, and the 3.2% rise during the first quarter is the fastest rise since 2010. These rises come amid a number of tax hikes implemented by the Obama administration, and concern is mounting among analysts that recent employment and retail sales data suggests spending is slowing. Many believe that the larger than expected fall in government spending pushed the GDP figure below many economists’ projections, which averaged around 3%. Fortunately however, the US seems set to continue bucking the trend for developed nations and grow at the top of the range. Compared to the UK, they are posting 2.2% higher growth figures whilst the French economy is flat and Italy contracted 2.4%.

Finally, German business confidence continues to fall after the Ifo think tank’s published report saw the index fall to 104.4 in April, down from 106.7 in March. The survey sent the euro to its lowest against the dollar in nearly three weeks on worries about the strength of Europe's largest economy. Worries about economic growth in China and the bailout in Cyprus have underlined the fragile global economic environment, whilst some big German firms have posted downbeat financial results as European demand wavers. Many people believe that if business confidence continues to erode in the powerhouse of Europe, the fallout to the periphery could halt the slow and painful task of rebalancing the Eurozone economy. This, we doubt, Germany can scarcely afford.

GBP This Week

This should be a quiet week for Sterling as the markets continue to digest the boost after the UK avoided the dreaded trip dip recession. The dominant events come in the form of PMI figures for the major UK sectors, starting with the announcement of Manufacturing PMI on Wednesday. The release is expected to rise from 48.3 to 48.6, and whilst an improvement to this number is always welcomed by the markets, we only anticipate a significant reaction if the figure posts sharply different figures from expectation. We then move to Construction PMI which is out on Thursday, which is also projected to rise from 47.2 to 48.2. Again, a rise should be well received but the figure still remains well below the crucial 50 expansion level. Finally we move to Friday’s all important Services PMI release, which is expected to rise marginally from 52.4 to 52.5. Looking at the recent GDP figures posted last week, we can clearly see the continued importance of the services sector as the key driver of UK growth. For this reason, we will be watching this release most keenly. Should Aprils figure fall in line with expectations we expect very little market reaction, and therefore the markets will likely see any adverse numbers as presenting a bearish trading opportunity.

Despite the bullish GDP releases of last week it is important to recognise that the UK economy is still fragile. For this reason we continue to remain on the bearish side of the Pound as we move into the second quarter of the year. In our view, the markets remain downbeat on the British economy, recently underscored by the Fitch Rating Agency downgrading the UK, citing a weaker economic and fiscal outlook in the UK. As we move into this week, although bearish in nature, we expect Sterling to have significant support at 1.5416 and 1.1830. These levels should remain reasonably solid if we post PMI data in line or above expectations this week.

USD This Week

The US is the busiest of the three majors this week, with the release of four employment figures topping the economic calendar’s “most watched list”. The most important of these is typically the non-farm payroll release which has the ability to significantly change market sentiment. This seems more likely than usual this week after March brought about a ten month low of 88k against expectations of 110k. The April figure is forecast to come in at 146k, however I believe it could be higher than this. Especially with the recent pickup in growth we have seen, coupled with the fact that three of the last four releases were above the April estimate. The other notable employment figure is the headline unemployment rate, which is due on Friday. This has been falling for two consecutive months now and subsequently there is a higher likeliness that we will see further improvement. Markets speculate that the figure should come in flat at 7.6%, however given the recent improvement in both the unemployment rate and non-farms, we would not be surprised to see this fall by 0.1% to 7.5%. Finally, ISM manufacturing PMI for April has our attention, as this figure has recently had the tendency to miss expectations quite considerably. Most notably, the proximity of the March figure at 51.3 means that should we see another significant miss, the index could be pushed below the 50 mark. Seeing this sector being pushed into contraction will certainly stoke the markets, and potentially be the second biggest driver of the week after the ECB rate decision.

EUR This Week

With bank holidays in France, Germany and Italy on Wednesday, markets will be thin on the ground during the middle of the week. However this may change massively on Thursday as the ECB announce their decision in relation to the headline interest rate. The EZ has held firm its 0.75% benchmark for 10 months now, consistently opting against any form of monetary easing despite difficult business and economic conditions for its members. We now look for a drop in rates by 25 basis points to 0.5% as leading economic indicators point to further pain in the region. Recently we have seen a shift in rhetoric, especially from European Commission President Jose Manuel Barroso, who described recent austerity measures as having “reached their limits”. This implies that senior policy makers are shifting focus away from austerity to growth, however as with anything mandated by the ECB, a reduction in rate is not a foregone conclusion. Apart from the ECB rate decision, we focus on PMI figures due on Thursday which are expected to show both Spanish and Italian manufacturing are contracting at a slower pace than expected.

In Other News

As fires break out at the collapsed factory building in Bangladesh’s capital Dhaka, efforts continue to reach the remaining survivors of the disaster which has already claimed more than 377 people. Our thoughts go out to those poor people and their families as we hope that justice can be served to the owners of the badly maintained building. In lighter news (to some!), Reading and Queens Park Rangers have both been relegated to the Championship after a goalless draw between the Premier League’s bottom two clubs. The game can at best be called lacklustre, as Esteban Granero clipped bar for QPR proved to be the highlight. Good news if you are a Cardiff fan though!!


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