US unsettles market
It doesn’t take much to spook the markets at the moment, and even when optimism seems to be recovering, it only takes the overlapping of a few negative events to send investors scurrying for safe havens. Yesterday we got that overlap as China revised down growth in April, back to lows last seen in November, US consumer confidence saw massive falls, and the European banks face a funding gap as the ECB withdraw €442bn of liquidity funding tomorrow. The bundle of worries has sent stock markets down, with the S&P500 falling 3.1%, and the European markets slipping by similar amounts. The fall in risk appetite has had its usual effect on the currency markets, and as the bad news involves Chinese growth a major export market for Australian commodities, it has had a disproportionate effect on the Australian Dollar which has allowed the Pound to push back up to above 1.77 overnight against the AUD.
The withdrawal of ECB liquidity measures tomorrow has raised some worries about the ability of European banks to find that funding elsewhere, and the European equivalent of the Libor rate, called Euribor, has risen to a nine month high as a result, which is still only 0.761% for three month borrowing. The worries over the banks potential funding gap has led the Euro lower, it slipped down over a cent against the Dollar, and allowed the Pound to extend its gains above 1.23 against the single currency.
Over in the US the main shock was the terrible consumer confidence figures, the index of which was expected to remain steady around 62.5, but actually fell to 52.9. As mentioned in recent notes the US consumer may be less important for global growth than in the past, but they are still an important driver for growth, and signs that the consumers may be tightening their belts is not well received by the markets. The news managed to strengthen the Dollar as investors sought the currency as a safe haven and stopped the Pound’s rally, which had managed to break through 1.51 before falling over half a cent.
We were due the final revision to UK GDP today, but the ONS has delayed the release for roughly two weeks due to ‘potential errors in some of the detailed figures’, so we will have to be content with just the current account and business investment numbers for the UK today. Eurozone CPI is expected to stay at moderate levels around 1.5%, while the ADP employment figures, which are used as a indicator of Friday’s non-farm payrolls, is expected to show rise of 60k, indicating some recovery. There are already signs of some fight back from yesterday’s bout of panic, and this might help keep Sterling supported throughout the day.