Is there a recovery?
After a strong set of retail sales figures gave Sterling a boost yesterday, markets have much to get their teeth into today in determining whether recent indications of a tentative recovery have any legs to them. UK retail sales for June released yesterday saw high street activity boosted by good weather, early summer sales and a rush to buy the latest electronic equipment ahead of the World Cup. Sales volumes were up 0.7% on the month, leaving them 1.3% higher in year on year terms. Core sales, that is sales excluding fuel, were up 1% on the month, the biggest jump in almost a year apart from February’s snow-related rebound. Though this saw Sterling make sustained gains against the Dollar, the gains made over the Euro were surrendered by a strong set of retail figures for the Eurozone itself, again boosted by World Cup related spending, and better than expected consumer confidence figures. Though the Pound has extended its gains against the Dollar to break the 1.53 barrier this morning, less impact has been felt against the Euro, with GBP/ EUR currently residing below 1.19.
The sales figures will have carried more weight behind them yesterday as a precursor to today’s imminent Q2 UK GDP release, with traders hoping that higher spending will make a noticable contribution to UK growth in this period. Expectation is for a 0.6% uplift, though markets will be mindful that similar strong figures were expected this time 3 months ago, only to be disappointing. On the whole however the retail figures suggest this is unlikely. The IFO current assessment indicators for Germany (of general business conditons) have been positive this morning, which may reinforce the sentiment created by yesterday’s sales figures. For EUR/USD the picture at the moment is distinctly cloudy. Against the backdrop of the last quarter’s multiple crises for the Eurozone, sentiment does appear to be improving on the single currency, despite major questions being asked of it’s sustainability given the political backdrop to the Greek bailout, and the long term economic health of some of it’s consituent members. The Dollar however, has several conflicting forces acting upon it currently, amid recently disappointing data for the US, greater risk aversion created from problems in the Eurozone, tempered by a renewed popularity for the Yen as a safe haven asset given the US’s domestic hiccups.
The major event today however, is the release of the stress tests conducted on Eurozone banks by the Committee of European Banking Supervisors. The release will occur in a number of stages. At 5pm CEBS will publish aggregate results of the stress test exercise and a summary report. From the same time individual banks’ results should be released by the national supervisory authorities (and the banks themselves in some cases). At 5.30pm a summary of the bank-by-bank results will be published on the CEBS website. Already, many onlookers are sceptical over the level of scrutiny imposed by the tests. The signs on this front are not promising. Across Europe, from Germany to Spain, via Greece, local authorities have dropped heavy hints that even some of their most troubled banks have passed the tests. With this in mind it is difficult to see even a promising conclusion being given much credence by the markets. In the UK’s case, all major British banks have already been subject to strict Financial Service Authority stress testing that forced them to raise more capital. There is little expectation that any of the big UK banks will fail the tests or be asked to raise large amounts of new capital. However, banks rise and fall on the same tides and any perception of weakness among European banks in general will not be good for the British banking industry.