UK in a double dip ... was it too much too fast?

Week Commencing Monday 30th April 2012

Overriding Market Themes

The pound had a good week versus both the US Dollar and the Euro on speculation that the Bank of England will suspend its Quantitative Easing program, despite the fact that the UK entered a double dip recession. Sterling climbed to a near 2 year high against the Euro as investors jumped to the relatively safety the UK offers on the back of the Spanish downgrade and continued concern over the results of the French Presidential Election. News from the US also led Sterling to gain against the greenback as growth in the world’s biggest economy slowed during the last quarter.  All in all, the pound is flying on despite the woes it faces domestically, how long will this continue and how big will the fall be? Who knows!


Its official, the UK is in a Double Dip Recession. A sharp fall in construction output was to blame for the economy contracting by 0.3% as compared with economists’ expectations of a small 0.2% growth. This presents itself to be bad news for the ruling conservative-liberal government who are embarking on the toughest budget reduction program in the western world. The figures are obviously very disappointing but it proves that an economy so heavily skewed on services will be hit harder than more balanced economies should the worst happen. How will the UK preform in the coming quarters, in my mind slightly better and will likely come out of recession in the next quarter, but fundamentally a real sustainable period of growth is a long way off.  


On the continent, the Eurozone sees a sharp decline in Retail Sales in all three of the big EZ economies (Germany, France and Italy). The PMI report of all these nations fell a staggering 8 points in March and is reading the lowest since troubles began in 2008. Sentiment is being ebbed away  by a every growing list of controversies and catastrophes, and the question need be asked when will all these troubles come to an end. Certainly the French Elections and the continued credit squeeze on SME’s and individuals isn’t going to help boost consumer confidence, so we expect to see continued recessionary tendencies from the Eurozone core, and even more bad news from the periphery to come. 


Also of note, we thought it was Impossible to get any higher but Spanish unemployment hits another record high! The number of unemployed in the economy reached 5.6 million at the end of March, making the overall percentages an amazing 24.4% unemployment level. That’s compared to a reasonably low 10% in France, 9.3% in Italy, 8.3% in the UK and 5.7% in Germany. 

GBP This Week

A reasonably quiet week for Sterling after the drama of last week’s schedule. The highlights will most likely be the UK Purchasing Manager Index on Tuesday, which tests manufacturing activity and outlook. I expect this to close slightly lower than previously reported on the back of these new GDP and confidence figures published last week. Construction PMI for April will also be released on Wednesday, which as we all know from the GDP report should post considerably worse than expected. Net Consumer Credit and borrowings against collateral should also drop marginally reflecting the issues raised above.


With very little news out from the UK it will be interesting to see if Sterling can maintain its momentum and continue to climb against the greenback and euro. With such heavy climbs over the past couple of weeks it is only fair to speculate that traders may seek to crystallise GBP longs.

USD This Week

This is a big week for the Dollar with non-farm payrolls and the unemployment rate being the highlight. Things kick off on Monday with personal consumption for March, which should post slightly lower in line with economic growth slowing. IMS Manufacturing on Wednesday should post reasonably flat whilst Non-farms should show a slight increase in the number of Americans seeking white collar jobs.


This could be a good week for the greenback as troubles in the Eurozone and weak news from the UK erode investor confidence.   

EUR This Week

Spanish GDP will lead the board on Monday morning, which is expected to post -0.6% for the year, continuing to fuel fears that the Spanish will be the next European state to seek financial support from the EZ and IMF. Wednesday sees German unemployment change for the month, with a slight fall in the number of jobs being culled to -10k from -18k previously and Thursdays ECB rate decision is almost certainly to be kept on hold. 


Finally, the Eurozone Retails Sales for March should post lower on Friday in line with the E3 report mentioned above. We expect this to be a bad news week for the Euro, so expect the currency to be under continued pressure from the US Dollar and the Pound moving forward. 

In Other News

The FA have approached Roy Hodgson for the top job in the England camp as bookies continue to have no clear idea who will be then next England Manager. West Bromwich Albion have given the FA chairman David Bernstein permission to speak to the 64 year old south Londoner and seems to have displaced Harry Redknapp as the favourite. Whoever it is, I think that having a English manager for a English team can only be a good thing, so whether it is Redknapp or Hodgson … come on England give us a cup! 


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