Feb
3
Mixed signals in the eurozone
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Hopes of an imminent agreement between Greece and its private bondholders were dashed on Thursday due to the opposition of some of the Greek political leaders towards additional spending cuts demanded by the lenders as well as a disagreement between the IMF and Germany on the involvement of the ECB in the bond swap.
Greece’s creditors doubt the country’s ability to carry out all the necessary reforms in order to reduce debt and they demanded additional austerity measures. Greek officials objected, fearing that implementing them would further aggravate an already serious recession in the country.
China may well be willing to help; During Angela Merkel’s official visit to Beijing, the German Chancellor has guaranteed the stability of the eurozone while calling for greater support from China, whose leaders have responded by suggesting there might be room to negotiate an expansion of the financial stability fund (EFSF) and the stability mechanism or ESM.
Meanwhile France auctioned 7.9 billion euros of various bonds on Thursday. The French government sold 10-year debt at an average yield of 3.13% compared with 3.29% the country had to pay at the previous auction held in January. Earlier on Thursday Spain auctioned 4.56 billion euros of various bonds exceeding the target of 4.5 billion. The country sold 3-year bonds at an average yield of 2.86% in comparison with 3.38% last month.
All in all EUR is not in a good place – better bond yields and the possibility of Chinese help (publicly this time) are good news but the fact they are even relevant is not.
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Feb
2
A rise in global manufacturing PMIs has helped shore up investor sentiment overnight and we enter a world in which risk looks to be very much ‘on’ again. But gains could be limited by reports that the IMF and Germany have yet to reach agreement over the size of the Greek haircut. While the Greek government have talked about a deal being reached in a number of hours, the IIF have suggested that it might take a number of days, implying that we might see another weekend go past without resolution. A Greek deal could see the euro rally, but stronger US data is likely to limit the upside. GBP/EUR is back at 1.20+ this morning, while cable is trading around $1.5850, which is its highest level since November.
Yesterday’s US Employment report was in line with consensus, with the number employed rising by 170,000. Although this proved to be much weaker than December’s 292,000 rise, the underlying trend looks to be upwards, which is consistent with the decline in weekly jobless claims to a weekly average of 350,000 from over 400,000.
Fed Chair Bernanke is due to testify to the House Budget Committee on the state of the US economy this afternoon. We suspect that he will continue to highlight the uncertainty about the path of recovery, which has hardly been helped by a downbeat forecast for 2013, which is sees growth slowing as previous tax cuts fade.
In the UK; The small fall in construction activity in the Advance estimate of Q4 GDP was surprising as warmer than usual weather normally boosts construction providing an offset for weaker utilities output. Given that January was also relatively warm (until the very end) there is a chance that Olympic Games related construction (several projects look to have been completed a little ahead of schedule) could provide a boost in January above consensus, but such blips will prove temporary.
Moving away from GBP, EUR and USD – the New Zealand dollar spiked yesterday evening a recent highs – benefiting from a return of risk appetite. Many analysts have showed their concern about the stubbornness of the kiwi at these levels and state that increased foreign appetite for New Zealand bonds since July is the main reason behind this strength in the kiwi. These same analysts still think a significant reversal is looming…
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Jan
31
Despite the approved ESM the Euro is still under pressure
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EU leaders managed to agree to set up the €500 billion European Stability Mechanism (ESM) fund overnight while pushing through the fiscal compact (despite the UK and the Czech Republic not ratifying the agreement), but there is still little sign of progress on the second Greek bailout. While finance ministers are supposed to have agreed a second bailout package by the end of this week, this has been lingering around since July with no final agreement. The EU and IMF are trying to ensure that Greek politicians sign up to austerity agenda in writing ahead of elections after Papademos’s interim government steps down. With 10-year Portuguese bond yield now above 17%, there is increasing concern that we will see a default elsewhere in the periphery, despite comments by the EU and IMF that Portuguese debt is ‘perfectly sustainable’. The key problem for European leaders remains the timetable with Greece running out of time to make debt repayments ahead of the 20th March deadline.
Although the Euro rallied over-night, France and Belgium set to hold auctions today a disappointing result could trigger such a change.
The rise in Spanish unemployment to just below 23%, with the number unemployed representing around one-third of total eurozone unemployment should see the eurozone unemployment rate tick up to 10.4%. Meanwhile, the number of German unemployed has fallen – the markets may view this as further evidence of the two speed Europe.
In the UK it seems that households have been retrenching their finances and are now happy to spend money, which should show up in stronger consumption and borrowing in the first quarter. The resilience of consumer confidence, which reached its highest level since June 2011 is another reason to be sceptical of the 0.2% fall in Q4 GDP.
The Case-Shiller index is likely to show a further fall in US house prices in November, but this will not hurt consumer confidence, which is expected to have risen on the back on falling gasoline prices and the New Year share rally.
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Jan
30
The European leaders meet yet again today to try and agree on the new fiscal compact agreement and to set up the new €500 billion European Support Mechanism. We’ll no doubt see European leaders insisting on further commitments from the Greek government in exchange for a another bailout package. Rumours over the weekend suggest that delegates had been pushing to put an EU official in charge of Greek fiscal policy with full veto powers over the government’s spending decisions. This of course has brought tensions between Athens and the other member officials to new highs and further progress in this area will almost certainly lead to private sector investors taking a loss on any Greek debt they hold.
Reports suggest a haircut of 60% is close to being agreed. Progress on the Greece matter should ease pressure on other periphery nations in a week that sees Italy, Belgium and Spain sell €22 billion of debt securities. Italy is due to auction €6 billion of 5- and 10-year debt today and will be hoping that it can sell 10-yer debt at yields around 6%.
With so many summit disappointments in recent months, markets are watching events in Europe nervously, which is why stocks were falling in early trading. All this has hit the Euro overnight, taking it from its high of $1.3235 to levels around the $1.3150. The euro has also eased lower against sterling this morning, but GBP gains have been limited as the latest Hometrack survey showed UK property prices stagnating in January.
The end-of-month EU Commission surveys are expected to show a further improvement in business conditions throughout the Euro Zone in January, which would be consistent with the view that any recession experienced will be much shallower than that seen in 2008-2009.
Data from the US came through a little weaker on Friday but we have seen little movement GBP-USD.
All in all a reasonably quiet looking week ahead with just the PMI numbers from the UK and Europe and the US nonfarm pay roll figures on Friday.
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Jan
27
Portugal weakens the Euro
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This morning the Euro has fallen against the Pound as the news from the Portuguese bond market was released. The 10-year bond yield has hit a new high at 15.25%, with investors growing their concerns on a possible contagion. Many analysts believe Portugal will need a second bailout. Meanwhile, the markets expects to hear from Greece’s deal with private-sector creditors soon. GBP/EUR is on a knifes edge as we wait with baited breath to see if Greece is given some respite.
Meanwhile GBP/USD has tested the 1.5700 mark as relatively positive news from the US economy and the bizarre confirmation that US rates will remain at 0.25% until 2014, releases the safe haven funds.
Looking elsewhere there has been some commentary that there is a near-term risk of EUR/CHF breaking 1.2050 and touching the Swiss National Bank’s 1.20 floor. Markets seem overly relaxed about risks stemming from Greece’s debt negotiations.
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Jan
26
Market Update
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Equity markets are broadly higher this morning with investors seeming taking some comfort from the Fed‟s decision to hold interest rates at „exceptionally low levels‟ until the end of 2014 rather than mid-2013. Although interest rates are now on hold for longer, the decision looks to have slightly pushed back expectations of further Quantitative Easing.
The dollar lost some ground after the announcement with euro-dollar trading back above $1.31, whilst cable rallied from $1.5620 to $1.57. Bearing in mind that the cross had been down to $1.5520 after the publication of Q4 GDP data, the rally in sterling is fairly solid and we suspect reflects a view that the 0.2% fall in fourth quarter output will be revised higher.
Following on from yesterday‟s Fed meeting we have a busy set of US data releases this afternoon. The December Durables Goods orders report kicks-off at 1:30pm and a rise in aircraft orders is expected to push the headline index up by some 2% or so at least. However, core orders are expected to be a little softer and the ISM Manufacturing survey points to a 1% rise on the month, which is also in line with consensus. Even if December data remain solid, there are some concerns that the expiration of a 100% capital deduction on 31st December will lead to a fall in orders in the first quarter. The tax allowance was only for assets actually used, rather than just ordered, so the full impact of any adverse effect should have been seen earlier in the quarter rather than just in December, however the risk remains of a weaker outturn, which would lower expectations for Q4 GDP growth.
Initial jobless claims fell from 402,000 to 352,000 last week, although that seems to reflect some seasonal adjustment factors rather than any underlying improvement. It is therefore hardly surprising that consensus is looking for initial claims to rise this week back at around 370,000 which is a little above the current 4- week moving average rate.
New home sales are expected to rise by 1.9% in December to 321,000, but this could prove pessimistic as the NAHB survey pointed to a sharp increase in sales. So there looks to be some upside risk to consensus and we could see a much stronger number if the new homes series starts playing catch-up with the NAHB survey.
The decision by the Conference Board to restructure their Leading Economic Indicator means that we have less faith over forecasts for the time being. The ISM delivery times component has been replaced by new orders and the M2 money supply component has been removed. The entire back series will be rebuilt so that it can be compared to GDP, but today the series will largely be ignored.
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Jan
25
Poor start to the day for GBP
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Big events of the day are the release of the Bank of England (BoE) minutes from their last rate decision meeting, which have already been released. UK GDP figures for Q4 2011 and the US interest rate decision this evening (UK time).
Whilst there are likely to be no surprises with the US certain to keep interest rates on hold, effectively at 0.25%, the press conference always provides scope for the Chairman words to move the markets.
The minutes of the BoE MPC meetings are published two weeks after the interest rate decision. The minutes give a full account of the policy discussion, including differences of view. They also record the votes of the individual members of the Committee. Generally speaking, if the BoE is hawkish about the inflationary outlook for the economy, then the markets see a higher possibility of a rate increase, and that is positive for the GBP. The member of the committee voted 9-0 in favour of keeping interest rates on hold at 0.5% but there were some hints that some members feel that further Quantitative Easing (QE) will be needed in the coming months – this has had a negative effect on GBP (particularly GBP/USD and GBP/EUR).
Q4 2011 GDP came in slightly worse than expected but only fractionally – this has had a slightly negative effect on GBP but coupled with the further pressure on GBP with the prospect of further QE – Sterling has had better starts!
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Jan
24
GBP/EUR has regained some ground after the increment to £10.8bn in the UK’s Public Sector net Borrowing in December, coming in lower than expectations (£12.2bn). The UK budget deficit in December rose to £13.7bn against a forecasted £14.9bn. In the April-December period the deficit was also lower than expected, rising to £103.3bn vs. £114.6bn.
In a slightly more long term view UK Inflation expectations for next 5-10 years have fallen to 3.2% in Jan from 3.4% in Dec – this is likely to have next to no impact but in theory does make GBP less attractive in the long term.
Meanwhile in Japan the BoJ says it will continue to carefully monitor the impact of overseas uncertainty on the Japanese economy. The central bank also stated that a zero interest rate policy will remain in place until price stability is in sight. The BoJ said it lowered its forecast for real gross domestic product to a 0.4% contraction for this fiscal year and a 2.0% gain for the next year.
The EUR/USD rallied briefly to 1.3062 high ahead of the Spanish bond auction results, but returned to 1.3000 psychological level where it is still standing. Spain sold €2.51B worth of bonds out of a targeted €1.5-2.5B. The 3-month paper is paying 1.285%, while the 6-month pays 1.847%, both lower than previous auction’s 1.735% and 2.435% which is good news for EUR.
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Jan
23
Market Update
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The Chinese lunar New Year holiday has effectively shut down most of the Asian stock markets today, which could be seen as a positive given the ongoing failure of Greek debt restructuring talks. Discussions are believed to have failed over the weekend, but there is due to be a teleconference with investors today. Those close to the discussions suggest that a haircut of around 70% is currently under discussion, which is significantly higher than the 50% demanded. This probably explains why we are seeing some hold outs at the moment. EU Finance Ministers are due to meet in Brussels after markets close and are expected to be dominated by the Greek debt-swap agreement. There had been hopes for an agreement over the weekend and time is certainly beginning to run out to avoid a default on 20th March when debt repayment is due.
Finance Ministers were originally due to meet to discuss implementing the fiscal pact and allow for the setting-up of the permanent ESM one year ahead of schedule. However, as has been usual in most recent summits the failure of EU leaders to come up with the comprehensive solution on sovereign debt issues means that new progress is unlikely to be made.
The shadow hanging over Greece combined with a dearth of data will leave stock markets with little direction today. French business confidence fell in January, confounding expectations of an increase and it is now back at lows last seen in February 2010. The Advance estimate of Eurozone consumer confidence is expected to also show a further deterioration with the expected 0.3pp dip to -21.4, putting confidence back at levels last seen in August 2009, confirming the shallow recession that we expect the Eurozone to experience in the six months to March 2012.
If finance ministers are constrained, EU foreign ministers have reportedly agreed on an Iranian oil embargo. Given that the Iranian government have previously claimed that they would react to any embargo by shutting the Straits of Hormuz, oil prices look set for a period of volatility. One sticking point for Europe has been to replace Iranian crude that flows to Greece and makes up around one-third of Greek crude purchases. There are hopes that Saudi Arabia or Libya will be able to provide oil to Greece on the same basis as Iran.
Having fallen to $109.50 in overnight trading, the front Brent Crude contract rose back above $110 in early trading and we could easily see it ramp back above $112 should Iranian threats continue and the global economy continue to show solid growth. Falls in oil prices on Greek concerns look overdone as the main contribution to global GDP this year will come from emerging and developing markets, who remain on track to grow by 6% yoy on average.
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Jan
17
No great surprise
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Having European markets open on a firmer footing after a positive Asian session following slightly stronger than expected Chinese GDP, retail sales and industrial production data. GDP expanded by 2% quarter-on-quarter and 8.9% year-on-year against consensus annual forecasts of 8.7%. This was the slowest pace of growth in over two years. Both exports and imports slowed while consumption contributed more than half of overall growth. The positive reaction probably owes more to a relief that growth is not falling precipitously, but markets are aware Chinese authorities are standing ready with stimulus measures such as possible cuts in the reserve requirement ratio should they be necessary. These could be taken positively or negatively on any day. Equities have opened strongly in Europe following 4% and 5% gains in Shanghai. The EUR has bounced by almost 1% against the USD and less so against GBP, but remains lower against a host of high beta currencies such as the AUD and NZD. The first test of this positive sentiment will come with the EFSF’s 182-day EUR 1.5bn bill auction at 11.00 GMT. Overnight S&P lowered the long-term sovereign credit rating of the EFSF from AAA to AA+. The Japanese government who has been a buyer of EFSF debt has since said it’s trust in EFSF has not been shaken and the downgrade will not immediately change its stance of purchasing them. The Japanese finance minister also he wanted to examine current FX moves before deciding on whether to intervene in EUR/JPY.
Markets were also keen to see the outcome of the latest French bond auction yesterday when €1.9 billion of 1 year bills were sold at a rate of 0.406%. This is an improvement on last week’s auction when the average yield was 0.454% and more evidence that while unwelcome, the EFSF news had already been largely factored in.
Draghi’s testimony to the European Parliament on Monday evening sternly reemphasized the need for coordination over the European debt crisis. The German Centre for European Economic Research (ZEW) survey is our first look at January data. There was a small improvement in the December survey, which suggested that the economy was slowing less than feared. A further improvement in the economic sentiment index is expected, but it would still see it at levels last seen in September. With the current situation index expected to fall from 26.8 to 24.0, which would mark its lowest level since July 2010.
Consumer Price Index (CPI) remains the key focus in the UK, with expectations for a sharp fall in prices from 4.8% to 4.2%. Retail Price Index (RPI) Index and House prices round of the events. Looking forward, with the Advance Estimate of Q4 GDP being released next week, we start to get the final piece of hard data to firm up forecasts. Last week National Institute of Economic and Social Research (NIESR) estimated that the economy grew by 0.1% in the three months to December despite what looks to have been a fairly sharp contraction in industrial production. December labor market data and retail sales could well outperform expectations as we would expect to see a seasonal hiring in December a little stronger than last year due to the mild winter. We look for only a 2,000 increase in the claimant count, but average weekly earnings seem destined to remain below 2%, leaving them well below the rate of inflation.
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