UK budget deficit shrinks after bumper tax revenues

The UK government is on course to meets it’s borrowing targets as UK records it’s smallest budget deficit for February since 2008.

UK budget deficit shrinks after bumper tax revenuesBritain’s borrowing bill shrunk by more than a third on a monthly measure as the government received its biggest income tax receipts for February since 2008.

The Government raised £4.2 billion in self-assessed income tax for the last month, helping borrowing fall by £3.5 billion to £6.9 billion from the same period last year, according to the Office for National Statistics (ONS).

Economists had expected borrowing to come in at £8.4 billion.

The improved figures mean the government borrowed £81.8 billion over the first 11 months of the financial year to bridge the gap between revenues and spending. This is down by £9.7 billon during the corresponding period in 2013/14, helping the Chancellor meet his target to get Britain’s public finances back into the black.

Income tax receipts rebounded sharply from April 2014 to February 2015, and now stand at their highest level since records began in 1997/98 at £153.9 billion, am increase of £7.1 billion from the same period a year earlier.

January and February are traditionally the biggest months of the year for tax receipts as self employed workers and top rate taxpayers make payments for income earned in 2013-14.

Last month saw Britain record its biggest budget surplus since the financial crisis.

The Treasury said the figures showed Britain’s plans for deficit reduction were “working” but warned that Britain was still “borrowing £1 for every £10 we spend and have more to do.”

“Today’s figures show the public finances improved in February by £3.5 billion compared to a year ago, with borrowing in February a third lower than it was this time last year” said HM Treasury.

In his last Budget of the parliament, Chancellor George Osborne promised to use government windfalls from the sale of bank assets and lower debt interest costs to begin paying down Britain’s debt mountain.

But Britain’s debt mountain still rose by £83.6 billion compared with February 2014, and currently stands at £1.46 trillion, equating to 79.6pc of GDP.

The Office for Budget Responsibility forecasts debt levels will finally begin falling in 2015/16.

FTSE 100 was almost unchanged today- despite strong results from Lloyds and IAG.

The FTSE 100 ended the day down just 3.1 points at 6,946.66.

FTSE 100 was almost unchanged today- despite strong results from Lloyds and IAG.Shares in BA owner IAG rose 3.7% after the company reported a big jump in full year profits and raised its 2015 forecast by 20%.

Lloyds Banking Group climbed 0.6% after it posted rising profits and confirmed it would resume paying a dividend.

The rest of the banking sector was mixed. Standard Chartered shares gained 1.5% as investors continued to react to Thursday’s news that its chief executive, Peter Sands, is to be replaced by ex-JP Morgan banker Bill Winters.

However, shares in Royal Bank of Scotland shed 5% a day after it announced another full year loss.

In other market news, publisher Pearson rose 1.7% after reporting underlying adjusted annual operating profits of 5%, in line with analysts’ expectations. Investors were cheered by Pearson’s pledge that earnings growth would resume this year after a two year restructuring programme.

Bookmaker William Hill fared less well, falling 3.3% after releasing first quarter results that showed revenues had fallen below expectations.

Shares in property website Rightmove jumped more than 13.4% after it reported a 26% rise in full year profit to £122 million.

On the currency markets, the Pound rose 0.2% against the dollar to $1.5437 and by 0.2% against the euro to €1.3790.

Oil prices- Opec members split over output cuts

The oil cartel OPEC is split over how to react to the sharp slump in oil prices.

Oil prices- Opec members split over output cutsSaudi Arabia has indicated it will not push for output cuts to help push up oil prices, as Opec oil producers prepare for their meeting on Thursday.

The oil market will “stabilise itself eventually”, said Saudi Oil Minister Ali al-Naimi. Saudi Arabia is the largest producer of the 12 members of the Organization of the Petroleum Exporting Countries (Opec).

Among the Opec members, Venezuela and Iraq have called for output cuts as the price of Brent crude has plunged 30% since June, triggered by a sharp rise in US shale oil output and weakening global demand.

There is speculation that tomorrow Opec could announce its first cut in oil production since 2009 in an attempt to support the oil price.

However, fellow Opec member United Arab Emirates’s (UAE) Oil Minister Suhail bin Mohammed al-Mazroui appeared to side with Saudi Arabia, indicating it would not push for a cut in production, saying “the market will fix itself ultimately”.

“We are not going to panic, this is not the first time, this is not a crisis that requires us to panic … we have seen (prices) way lower. We are not interested in the short fixes because we know they will not last,” Mr al-Mazroui told Reuters.

The responses from Saudi Arabia and UAE come a day after non-Opec member Russia, which produces an estimated 11% of global oil, said it would not co-operate with any production cut.

Following a meeting with Saudi Arabia, Venezuela and Mexico representatives, Russian Energy Minister Alexander Novak said the country’s energy companies would produce around the same amount of oil next year as they did in 2014.

He told reporters in Moscow he was sceptical that Opec would decide on Thursday to cut output quotas.

The heated debate over how to react to the sharp fall in oil prices has led to some suggesting that Thursday’s meeting could last longer much longer than usual.

“It might take a bit longer than the ordinary meetings,” said one delegate. “They must agree, even if they have to stay here for two days. It is a matter of death or survival for budgets.”

Sterling stalls ahead of services data

Yesterday’s strong Purchasing Manager Index survey of the construction sector for the UK economy brought more good news for Sterling.Sterling stalls ahead of services dataThe November gauge of activity levels in Britain’s building sector, which many analysts are looking to in order to return UK PLC to economic prosperity, printed at 62.6 up from October’s showing of 59.4 and well ahead of the consensus opinion of economists which was that the figure would show at 59.0.

The news allowed the Pound to maintain levels against the euro and dollar ahead of the services PMI due at 9.30am (GMT) today. This is expected to show a small decline from last month and may put a temporary halt to Sterling’s seemingly inexorable recent rise.

Not for the first time in recent weeks, the data coming out of mainland Europe has been encouraging, with the publication of numbers which revealed that the level of factory orders has risen for the fifth month on the trot in the Eurozone. However, the euro remains stuck in a tight range ahead of the ECB meeting on Thursday as the market waits to see if the bank will follow last month’s cut in deposit rate with another more radical change in policy.

The ECB’s options are still wide ranging – they still have room to cut rates, they may an nounce another LTRO and the nuclear option would be to announce negative deposit rates. They will probably do nothing but wait and see, although the uncertainty over their next move is keeping the single currency on a tight lease ahead of Thursday’s meeting.

The dollar retreated against the yen and a basket of currencies in Asia on Wednesday as investors locked in profits ahead of major risk events including US jobs data due later in the week.

The Australian dollar, meanwhile, tumbled to a three-month low after Australia’s July-September gross domestic product growth failed to meet market expectations. The Reserve Bank of Australia kept its cash rate steady at a record low of 2.5 percent on Tuesday, and reiterated that the local currency remained “uncomfortably high”.

The Aussie skidded 1 percent on the day on Wednesday to $0.9045, its lowest since early September, after data showed the economy grew 0.6 per cent in the third quarter, falling short of forecasts for 0.8 per cent growth .

US Dollar slides as money markets risk worries decrease

Risk appetite has continued on an improving trend since the end of August.
US Dollar slides as money markets risk worries decrease
A mixture of easing tensions surrounding Syria and stronger data globally have helped to shore up sentiment. US Treasury yields have lost some upside momentum as tapering worries have eased, providing relief to risk assets including emerging market currencies.

Therefore, the Dollar continues to lose ground and looks susceptible to additional slippage in the days ahead. Eurozone industrial production will be the main data releases of note today.

In Asia, central banks in Korea, Philippines and Indonesia will follow the RBNZ overnight with policy decisions. No change in policy is expected from any of the central banks. Indeed, the recent firming in the rupiah suggests that there will be less urgency for Indonesia’s central bank to hike rates to protect the currency.

The Indian rupee has been the best performing currency since the start of the month as portfolio capital has returned. In the near however, the INR looks may struggle to breach the 63.00 level versus US Dollar.

Swiss officials continue to defend the CH Franc ceiling and show no sign of eliminating it any time soon.

Wise Money agrees that the Franc remains overvalued but the reality is that Swiss economic data has shown some improvement while foreign demand for CHF assets has eased in the wake of improving sentiment towards peripheral Europe as reflected in reduced Swiss banks’ foreign liabilities.

The SNB is also not intervening to hold back CHF gains, with reserves growth flattening out over recent months. Although any reversal of flows from Switzerland will prove sticky the bias for EUR/CHF will be higher. In the near term the currency pair may run into resistance around the top of its recent range around 1.2438.

Syrian action now deemed unlikely on Putin intervention

American military action in Syria looks increasingly unlikely after President Obama, seemed to back the political solution suggested by the Russians of the Assad regime giving up its chemical weapons.
Syrian action now deemed unlikely on Putin intervention
Mr Obama, faced with increasing opposition in congress to the use of military force, will now push for a UN resolution on disarmament that will probably also authorise the use of the force if the deadline for handing over weapons is not met. It marks a huge political U-turn for the American government, who looked set for launch air strikes imminently.

The news has released pressure on the US Dollar, lifting the Yen in particular as the Nikkei also regains highs last seen in July.

Sterling, in the absence of any more developments in Syria, looks set to consolidate above the 1.57 until next week’s FOMC meeting. Today’s unemployment numbers from the UK are the highlight, particularly as forward guidance is now explicitly tied to getting the jobless rate back below 7 per cent.

The recent Bull Run in Sterling and UK economic data in general remains a concern for at least one branch of the UK government, with Vince Cable warning against complacency after only a few months of good data. With little UK data left this week, focus now turns to retail sales, which are expected to show strong growth and CPI data forecast to show inflation remains stubbornly above target.

The attention of the market is very focused on Sept 18 and the FOMC meeting. Tapering is expected to commence but the exact make up of any reductions, either in Treasury bills or MBS or something involving reverse repos is very unclear at the moment.

Last week’s jobs number confused matter slightly posting lower than expected jobs growth and the unemployment rate falling only because the participation rate continued to fall. Even with the slight slowing in the pace of job creation the Fed has gone to extreme lengths to pre-warn the markets about tapering, failing to begin this month would be a huge surprise.

US Dollar on the defense

Yesterday the US Dollar came under pressure as speculation increased that the Federal Reserve will hold off on tapering in September.
US Dollar on the defenseThis speculation increased significantly following the disappointing payrolls data on Friday which came in much lower than hoped for at +169,000 against hopes for a reading over 200,000.

The labour market data and most especially the non-farm payroll data was always going to be a leading indicator to direct the Fed and although the Fed are still confirming that they have an open mind on tapering, the view is that they will hold off for now.

In the money markets this could lead to further gains for GBP/USD and EUR/USD especially if the possibility of intervention in Syria recedes as it currently seems to be the position with the hopes of Syria placing its chemical weapons under international control.

In relation to economic data, we have just had Italian GDP which has come in worse than expected for Q2 with a revision down to -0.3% for the quarter on quarter reading against the expectation of -0.2%, French manufacturing production and industrial output also came in weaker than expected.

The weaker data will help to reinforce the view that the ECB need to keep policy loose and should help to keep a lid on EUR/USD gains.

Elsewhere in China data has continued to point in the right direction with August industrial production rising to 10.4% and retail sales coming in at 13.4% against expectations of 13.2%. The good Chinese data will boost risk appetite and will help support the AUD which has gained overnight.

The UK Chancellor George Osborne publicly stated yesterday that the British economy is ‘turning a corner’, but investors holding GB Pounds remain unconvinced and are not buying into the rhetoric for now. Recently, we have seen a very strong run in economic data which has translated into a stronger Pound to some extent although there is still an element of caution.

Fed’s tapering timing crucial distraction from Syrian crisis

As most politicians were divided last week on the Syrian crisis at the G20, investors and economists remain divided on the timing of the Federal Reserve’s tapering programme.
Fed's tapering timing crucial distraction from Syrian crisis
With softer than expected data out from the US non-farm payroll figures, investors looking to flock to the US with their capital suffered a setback as the tapering programme can only be put into action with stronger employment numbers.

However, since the number was not weak at 169,000 new jobs in August against an expected number of 180 000, the Federal Reserve is still expected to announce that tapering could begin this month or early October, as Ben Bernanke will reveal early next week after the interest rate decision.

As we move into this week, US stock m arkets could be faced with considerable volatility depending on if the Congress decides to authorise a military strike against Syria. We start this morning with the Greenback slightly weaker than the previous weeks at 1.5640 GBPUSD and 1.3175 EUR USD.

Amidst expectations that the Fed will curb quantitative easing as early as this month or the next, gold has extended its losses and has fallen 17% this year.

From the UK, it was further revealed that manufacturing production has also risen for the second month in July by 0.2% adding to the already accumulated positive sentiment after a spate of good data from the economy.

With no economic data out from the UK today, expect Sterling to continue to remain strong as it has surged upwards against the greenback, post the softer job numbers to a high of 1.5650 early this morning, coupled with the evidence that suggests Britain’s economy is slowly starting to recover.

George Osborne is also expected to make a statement today to reiterate that the coalition’s plans of spending cuts and policy measures were the right step in getting Britain back on its feet towards recovery.

US Non Farm Payroll data released

The Non-Farm Payrolls is arguably the most important release of each month but this month it will be the most vital indicator for the future direction of the US Dollar.
US Non Farm Payroll data released
Ben Bernanke and the FED hinted for months that the improvement outlook in the US labour situation could trigger a scaling back of Quantitative Easing. September has become to be known as SepTaper as a tapering of the asset purchase programme could be a real possibility.

The US dollar, stocks and treasury yields indicates that many investors are still unsure there is enough reason for the Federal Reserve to taper asset purchases in September and the Non-Farm Payrolls today could provide vital clues.

According to most economists a 150,000 reading or better will be enough for the FED to scale down QE. According to the consensus, the market is expecting a reading of 180K and if past NFP releases are any guide, anything below consensus could spark a US Dollar selloff. There is a strong argument for a bullish number.

Service sector activity expanded at its fastest pace since January 2006 and interestingly, the employment component of the report rose to its highest level in 6 months. The ISM index rose from 56 to 58.6 in the August. Jobless claims dropped to 323k from 332k and continuing claims also declined by 43k to 2.95 million. The only disappointing data came from the manufacturing sector where job growth slowed slightly despite an increase in activity.

Over in Europe, the ECB kept interest rates unchanged. Draghi started yesterday’s press conference talking about the gradual signs of recovery, but he warned of downward risks. Draghi conceded, while answering one of the questions, that he doesn’t exclude the possibility of more rate cuts again if market interest rates move in an unsatisfactory way.

The ECB has been uncomfortable with the rise in the market interest rates and he has used forward guidance to reduce volatility to contain the market’s overreaction to the recovery. The ECB raised its 2013 GDP forecast to -0.4% from -0.6% but lowered next year’s forecast to 1.0% from 1.1%. Widespread improvements in U.K. data contrast sharply with mixed economic reports from the Eurozone.

The Bank of England has also left monetary policy unchanged yesterday. We will have to wait two weeks to see if the MPC members are comfortable with a much improved outlook for the UK economy.

The US Dollar continues to struggle as interest rates fears persist

There was further turmoil in the market late in trade yesterday as there were hints, again, that the Federal Reserve in America may start to taper or reduce the amount of Mortgage Backed Securities they purchase a month.
The US Dollar continues to struggle as interest rates fears persist
This sent the markets into a flurry of risk off activity with government bond yields increasing across Europe while major European indices lost over 1% on average.

This came after industrial output in the UK came in slightly better than expected across the board citing oil and gas production as a major factor.

Yesterday saw GB Pound/US Dollar rise over 1.56 for the second time in three days this was mainly dictated by the sharp rise in EUR/USD to 1.3315 to hit an almost 4 month high.

The GBP/EUR has continued to remain range bound and after earlier pressure it regained its composure to keep the trading range between 1.1690 – 1.1775.

After the recent flurry of positive data, before new governor Mark Carney takes the reins at the Bank of England, it is expected that today’s claimant count change will have fallen again, for the 7th month, in May in another positive sign that the UK’s job market is finding its feet as the nation continues to hire.

On the other side of the pond – as further hints about the Fed tapering the 85 billion worth of MBS purchased a month continuing to weigh on the greenback we have a quiet session ahead data-wise.

Without any strong positive news or data for the US it is likely the USD will continue to struggle today against GBP and EUR but mostly remain range bound between 1.5550 and 1.57 where key support and resistance levels.

As the legality of the Open Market Transactions continue into their second day in the German Constitutional Court, further negative news for the euro has struck with Greece being downgraded from a developed nation to emerging-market status as the local stock index has fallen 83% since 2007.

This morning’s data release saw inflation figures across the Eurozone’s 4 largest economies remain stagnant with France seeing a slight fall to 0.1% against expectations of 0.3%.