UK economy still growing weakly claims NIESR

The UK economy is still growing weakly, a study has said, expanding by only 0.3% over the December to February months.

The economic expansion came despite the impact of the heavy snow in January, said the National Institute of Economic and Social Research (NIESR).

Its latest economic growth data comes a month after official figures were revised up to show the economy expanded 0.3% in the final quarter of 2009.
 

The Office for National Statistics had earlier reported growth of 0.1%.

The NIESR growth figure for the three months to February is in comparison with the September to November period.

The research body said it did not expect UK economic output to return to the peak seen at the start of 2008 until 2012.

Earlier on Wednesday, the Office for National Statistics said that UK industrial production had fallen by 0.4% in January because of the impact of the bad weather. 
 
This was the biggest monthly decline since August last year. 

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US Dollar shines after positive minutes

Yesterday the markets digested the minutes of the February interest rate meetings for both the UK and the US. 

Firstly looking at the UK the vote was a unanimous 9-0 to keep interest rates on hold and also to hold QE at £200 billion. The feedback from the MPC was ambiguous in the sense that the decision was unanimous and yet the comments were that it was a "finely balanced" decision to keep QE on hold. 

The unanimous decision gave Sterling a boost which was then tempered by weaker than expected employment numbers. Going forward this does not change the sentiment for sterling which will struggle to appreciate until the outlook for the UK warrants a more hawkish approach from the MPC.

Over to the US and the FOMC upgraded their forecasts for the US economy reflecting a more bullish tone from the Fed. 

They also discussed trying to shrink their reserves over time although no time frame was announced to do this. The positive tone from the Fed with improved economic sentiment in the US coupled with loitering fear in the markets helped to push the USD higher.

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Eu bullies Greece over finances and raises sovereignty question

The European Union has bullied Greece by stripping it's vote at a crucial meeting next month, the worst punishment ever suffered by an EU member state.

The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. 

It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty which would amount to economic sovereignty.

While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.

Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from "receivership".

The EU has still refused to reveal details of how it might help Greece raise €30bn (£26bn) from global debt markets by the end of June. Investors are unsure whether this is part of Kabuki play of "constructive ambiguity" to pressure Greece and keep markets guessing, or reflects the deep reluctance by Germany to be drawn deeper in an EU fiscal union. 

Greek bonds sold off as ten-year yields jumped to 6.42pc, but the euro rallied to $1.3765 against the dollar as broader issues resurfaced in currency markets.

Jean-Claude Juncker, head of the Eurogroup, hinted that ministers have already agreed on a support mechanism, should it be necessary. It will most likely involve by bilateral aid by eurozone states. He said proposals for an IMF bailout - backed by Britain - were "absurd" and would shatter the credibility of monetary union.

Many Germans disagree, including Otmar Issing, once the backbone of the European Central Bank. He said an EU rescue for Greece would be fatal, arguing that unflinching rigour is the only way to hold monetary union together without political union.

Tuesday's EU verdict amounted to a thumbs down on Greece's earlier austerity efforts, viewed as too reliant on one-off measures and too light on spending cuts. 

Greece must reduce its deficit from 12.7pc of GDP to 3pc in three years. Greek customs officials expressed their anger by kicking off a three-day strike, the first of many stoppages set to culminate in a general strike next week.

However, premier George Papandreou has won support from key political parties and a majority of the people.

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UK jobs market is still on the ropes- CIPD

The UK economy is facing more redundancies, with substantial cuts expected in the public sector, a report has said.
Almost one in three public sector employers plan to shed jobs this quarter, the Chartered Institute of Personnel and Development (CIPD) said.
Its latest quarterly survey found that the jobs outlook had worsened despite the UK emerging from recession.
"The UK jobs market is still on the ropes," the CIPD said as unemployment currently stands at 2.46 million.
The number of people out of work had been steadily rising since the summer of 2008, but saw a surprise fall in the three months to November.
The latest unemployment figures will be announced on Wednesday.

In the public sector, defence and public administration look set to be hit particularly hard.
However, there was better news from the private sector, which expects to see staff numbers grow for the first time since the start of the recession.
The CIPD's survey also reveals that the outsourcing of jobs abroad is a concern for the employment market again.
One in 10 companies is looking to outsource jobs in 2010, with almost half of IT companies saying they would be moving jobs abroad.
India remains the most popular outsourcing destination, followed by countries in Eastern Europe.

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Volatility is the name of the day

A good start for Sterling quickly turned sour as fear once again gripped the markets by the throat. 

A lack of action points on the Greece situation certainly did not help matters, however other factors also conspired to turn the markets away from risk. 

A big factor was the decision from the Chinese central bank (PBOC) that it was once again raising its reserve requirements by another 50 basis points. The decision to do this is to cool the rapid pace of credit growth in China which is unsustainable.

The monetary tightening will hurt global growth sentiment as China is the key driver for global recovery; in particular Australia will suffer. 

The news led to a sell off in the AUD, GBP and the EUR; the negative vibes were not helped by weak Eurozone data this morning with GDP coming in at a lame 0.1% against the expectation of 0.4% and a decline of -1.7% for Industrial Production.

Given the mood in the markets we can expect to see more selling pressure on EUR/USD and GBP/USD…later today we have US retail sales- a +0.4% is expected and a good number is need to help lift the cheer in the markets. 

EUR/USD at 1.35 is a key level to watch out for and if broke should enforce further downside momentum. Sterling has benefited on the weakness in the euro pushing beyond 1.15 again.

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Greece- is there a deal or not?

EU leaders are meeting today in an attempt to lay the foundations for a deal to rescue Greece. 

Lots of speculation already touted this morning. There has been talk of IMF assistance and then IMF involvement without funding. Germany and France are widely expected to shoulder most of the responsibility in supporting Greece. 

The most recent feedback is that aid for Greece will depend on Athens meeting its deficit reduction targets this year- begs the question- what if they do not? 

Lots of fence sitting which is still leaning to reduced confidence in the markets and associated strength of the safe haven currencies such as the USD and the YEN. Expect more volatility as more news and feedback filters through.

Sterling is suffering from a hangover today after a little too much of Mervyn King yesterday. 

The Bank of England governor killed off the rally in sterling by leaving the door open for a further expansion of the QE programme. However it was not all doom and gloom from King who dismissed fears that the UK would lose their AAA credit status. 

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Euro bashing rests for porfit taking

However the pause in its recent decline is more to do with profit taking than a reversal of the currency’s fortunes. 

Today's Financial Times suggests that £7 billion of short trades are weighing against the eurozone's immediate currency prospects.


We did see both Euro and Sterling hit 8 month lows overnight as the Asian markets rushed to buy the perceived safe haven US Dollar but once again, proximity to support levels was enough to bounce both rates as Europe entered the fray. 

The concern for Euro bulls is that recovery attempts seem very limited in scope and small in magnitude. 

The rally for the single currency in the US last night was snuffed out by the combination of a late sell off in equities and an expectation that Bernanke’s testimony this evening could very well signal a more hawkish Federal Reserve outlook, with speculation that he might lay groundwork for a tightening of monetary policy.

Yesterday’s markets, outside the late US fluctuations, were largely extremely boring with traders waiting for developments (either good or bad) on the Eurozone Sovereign issue. 

Nothing much happened. The Spanish Finance minister was in London talking to bond holders and the Portuguese and Greek governments were both vocal in their defence of their respective fiscal positions Data again is light today with UK trades and US wholesale inventories the highlights. 

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Currency markets future directions

US Dollar and Sterling should continue to improve against the Euro and Yen for the short term at least.

With the presumption being that the improvement in performance for both economies can be traced back to their recently acquired, more competitive exchange rates. 

Large moves in the next day or so, do look limited however, given the upcoming monetary meeting in Europe and the UK and given that much of the Euro’s recent weakness has been as a direct result of negative news from Greece. 

It has to be assumed that most, if not all, the bad news has been priced in by markets now and the currency might be set for a bit of a lift as it benefits from an increase in risk appetite. 

The Euro itself looks unlikely to surge however, given the likelihood of IMF intervention in Greece’s affairs and for those precious metal aficionados out there, it is worth noting that at present, Greece holds over 71% of its foreign reserves in gold, which at the end of December stood at just shy of $4 billion. Watch the gold price after the IMF have been in …..

Overnight the Reserve Bank of Australia surprised all but a few by leaving their official interest rates at 3.75 % against the expectation of a 0.25% increase, citing the lack of credible information so far on the effects of the previous increases, thus judging it appropriate to hold rates steady for the time being. 

The Aus$ dropped sharply on the release but stabilised on a later caveat from the RBA that if the economy continued to improve, as has been witnessed over the recent period, rates would need to be raised further. The currency held at around 88 cents versus the US$ but given the anticipated continued demand from China for global commodities.

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Wise Money forsees a volatile week ahead

It’s a big week for the currency markets with a number of events that will most certainly add to the already volatile conditions which we saw in January.

The Euro has continued to slide against the Dollar over the weekend as concerns that Greece's budget problems may spread continue to weigh on the single currency. 

Recent data from the Commodity Futures Trading Commission has shown that bets on a further decline now stand at the highest level in over a year. A strong Q4 US GDP figure (and subsequent stock market gains) on Friday further supported the dollar positive sentiment and helped the greenback reach a four-month high against the Swiss franc and a three-week high against sterling as signs the world's largest economy is gaining momentum spurred investors to buy U.S. assets. 

Reports due later today are also expected to show that show U.S. manufacturing expanded for a sixth month and household purchases rose.

In the UK, attention this week will focus squarely on the Bank of England's policy decision on Thursday and what this will mean for the future of the asset-purchase facility. 

With the property market showing signs of strengthening and the economy exiting recession, the MPC may move towards pausing it's emergency bond purchases after buying 200 billion pounds so far.

UK data earlier this morning showed that house prices rose for a sixth month in January as a shortage of homes for sale supported property values. However, prices were still down 0.8% from a year earlier.

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Greece denies a bail out is required

Greece's Prime Minister George Papandreou has denied speculation that it will have to be bailed out by the European Union.

Reports have suggested that the EU will pump money to help Greece whose public finances are in ruins.
At the World Economic Forum in Davos, he also said countries like his "are being used as the weak link, if you like, of the eurozone."
European leaders also denied that Greece would be kicked out of the euro.
"Nobody's going to be leaving the euro," Spain's Prime Minister Jose Luis Rodriguez Zapatero said.
"On the contrary, countries will be joining the euro in the future. The same is true for the EU. That is the best proof on how the EU has helped to guarantee stability."
A report in Le Monde suggested that the EU was considering bailing out Greece because the Hellenic nation's woes had shaken the euro.
'Speculation'
European Central Bank President Jean-Claude Trichet said the pact had helped keep the 16 members of the eurozone from experiencing even more strain.
Mr Papandreou said that there had been a lot of "speculation" during the financial crisis and that people were against the euro had targeted countries like his in the bloc.
Greece's public debt stands at about 300bn euros ($419bn, £259bn).
He also denied a Financial Times report that said Greece had been asking China to buy up to 25bn euros of its debt to help secure its finances.
But Mr Papandreou refused to blame the EU for the country's troubles.
"We Greeks see it as our problem to put our house in order," he said. "Greece blames itself, not the EU."
Mr Papandreou also floated the idea of having EU government bonds for all the members in the bloc.
The crisis is seen as the first test since the euro was created in 1999.
Greece, Spain, Portugal, Ireland and especially Italy together account for 40% of the eurozone's debt.
Their debt has ballooned as their countries have been battered by the financial crisis, while larger economies have had to spend huge amounts to bail out their key industries.
Since the financial crisis last year, many countries - including the UK, France and Germany - have risen above the EU's limits on public spending as a proportion of growth.
The EU's Stability and Growth Pact states that no nation in the bloc should have an annual budget deficit higher than 3% of its gross domestic product.
Greece aims to shrink public debt to 9.1% of overall economic output this year, down from 12.7% last year.

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UK crawls out of recession

UK Quarter 4 GDP growth for 2009 came in at + 0.1 %

Although well below the forecast of + 0.4 %, it signals that the UK has finally emerged from the recession- for now. 

The UK economy contracted 4.8 % in 2009 the biggest fall on record so a year to forget for the UK economy and the Pound. 

The data was much weaker than expected and the Pound fell from a high of 1.6268 against the USD down to 1.61 following the data. 

A spokesman for the Prime Minister ditherer brown affirmed that we are right to be confident but cautious about the economy- I would say more cautious than confident. 

The concern now is that the UK could slip into a double dip recession if the tepid growth experienced cools as we move through 2010. 

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GDP economic data for UK and US awaited

The lull before the storm? There is little economic data today, therefore the markets will be left to their own devices for the next couple of trading sessions. 

Having said that, the Far East continued Friday’s trend in equities to finish lower on the session. Wall Street traders were spooked somewhat by the seemingly ever-more frantic measures that Obama is promoting to try and revive his flagging popularity and news that Bernanke’s re-election for a further term was in doubt just left any bulls side-lined. 

The re-appointment of the dovish Ben Bernanke is seen as vital for the continuation of growth in the US economy going forward…..

At this stage in the week’s trading timetable then, we are very much looking forward to data and events later in the week. The headline catcher will be the release of updated GDP numbers from both the UK and the US with positive revisions expected for both. 

Although Alistair Darling has been down-playing expectations for the UK figure, the weekend press and market pundits have all (or mostly all) pencilled in a positive figure for the 4th Quarter (+0.3% giving a less negative annualised number of about -3.0%). 

This will no doubt be heralded as the first indication that the trough of UK economic performance has been passed and be greeted with great enthusiasm. The road to full recovery however will remain littered with potholes so expect any Sterling strength on the back of the news to be short-lived.

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Financial markets lack direction

Yesterday we saw a bout of US Dollar selling pushing EUR/USD back to 1.45 and supporting the Pound in a run up towards 1.62. 

This ran out of steam in later trading as the markets became range bound with this pattern continuing so far today. Data from the UK today showed a reduction in the trade deficit and overnight we saw BRC retail sales come in at +4.2% year on year; both data better than forecasts. 

However it was not all good news for the UK as RICS December house price balance came in at +30 from +35 in November- the expectation was for +36 and this was the first drop since Feb last year.

Overall we have seen more positives coming from the UK data snaps and this should bode well for the Q4 2009 GDP data.

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US dollar weakens on news

A combination of factors has caused a weaker US Dollar this morning. 

Firstly the market is still reacting to the disappointing US non-farm payroll data on Friday; the expectation was for a positive number at +10,000, however the actual came in at -85,000 for the month of December. 

This data after volatile markets led to a weaker US Dollar. This morning the Pound and the euro have gained further against the greenback with sterling heading towards 1.62 and the euro pushing back over 1.45. 

The weekend release of December Chinese trade data which came in above expectations is helping lift risk sentiment in the markets. Chinese exports rose 17.7% in December helping to reinforce confidence in the global recovery and lifting FX risk flows. 

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Which is the weaker- Yen or Sterling?

Both Sterling and the Yen are being seriously undermined by both political and economic concerns and are racing each other towards the edge of the precipice.

On the Japanese political front, the replacement of Fujii by Kan as Finance Minister was not greeted enthusiastically and as mentioned yesterday the Yen took a little dip in value. 

The major concern, was that the Japanese bond market might take flight and the ability of the Ministry of Finance to satisfy the country’s massive debt mountain could become compromised. 

Added to this, the first official comments from Kan were distinctly Yen negative with him saying he wants the Yen to weaken further (it fell immediately from 91.10 to 91.75) and then adding that many Japanese firms favour the $/Yen rate at 95.00 and that he must work with the Bank of Japan to bring the Yen to appropriate levels. 

Beat that lot, sterling …. Well it did try its best.

On the UK political front, the call from the 2 cabinet members for a secret ballot of Labour MPs to establish Gordon Brown’s position as leader of the party was viewed very negatively by the market on the assumption that a leadership battle this close to the election would be the final nail in the coffin for the Labour party but also, might be enough distraction for them to take their eye off the economy. 

Following on from this, there is a report in the Times this morning headed up, "Cash-strapped Treasury contemplates shining up gilts" which ponders the possibility that the Government might be forced to offer higher returns on its gilts in an attempt to maintain their investment appeal. 

This will obviously have the effect of further increasing the cost of servicing the country’s borrowings from the current forecast of £60 billion per year - and that is just the interest component.

Old Black Eyebrows is seeking to sell a record £225 billion tranche of debt this year at the same time as the Bank of England look to offload the bonds that it acquired via the Asset Purchase Scheme as part of the QE process and against the back-drop of investor concern over the UK’s status as a AAA rated sovereign. 

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Higher yielding currencies early 2010 gains

Positive interest in many Far Eastern and Antipodean currencies continues as investors look to the Asian and Pacific regions for the most likely currency appreciation during 2010. 

Apparently confirming the view, a researcher at the China Academy of Social Sciences (a Chinese Think Tank) told reporters that the Renminbi should be revalued by a one-off 10%. This, though, was mis-translated apparently with the Chinese version reading, they ‘think that it is good to push for a 10% rise but that NOW is NOT the right timing’. 

Despite this, the mood is set for gains in the region with just the Yen bucking the trend, having started to lose its recent upward momentum. As mentioned previously, the gradual widening of the interest rate differential between the Yen and the other major currencies, favour its return back to the funding currency of choice. 

The resignation of the Japanese Finance Minister, Fujii on health grounds (he had been viewed as a steady hand on the tiller on the back of his considerable experience in markets) leaves a big gap in the government’s ranks ahead of an important financial period and a crucial debate on fiscal policy. 

His withdrawal from the fray also makes intervention much less likely, negating the possibility of official support for the Yen if the market does start to push it back towards 100 versus the Dollar.

The trade of the year call however is to be short Sterling / Aussie now that the strong support at 1.7700 has broken. Talk is for a move down to 1.6000 which, unless you view Cable as being a non-mover, suggests a move in Dollar/AUD down towards, but not through, the parity level. 

This backs up the argument that commodity currencies will dominate proceedings during the early stages of the year with the Aussie, Kiwi and Canadian Dollars the punters favourites.

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Sterling kicks off 2010 in bright form

As usual, the trading periods between the Christmas and New Year holidays threw up some sharp moves, especially in the Dollar/Sterling cross, with one 24-hour session seeing cable trade up from 1.5850 to 1.6225 before settling back down below 1.6100. 

The few Banks still operating certainly enjoyed themselves. Today we start with Sterling looking relatively firm and the Yen soft. Euro/Dollar, which didn’t experience the more extreme moves seen in cable, remains in the mid 1.43s. 

The Yen has been the weakest currency over the last month since the newly elected government embarrassingly forced the Bank of Japan to change its established tack and boost QE whilst expanding fiscal spending. This has renewed appetite for using the Yen as a funding currency and with expectations that interest rate differentials are set to widen against the Japanese currency, this trading trait looks set to grow, to the Yen’s detriment. 

An article in the Wall St Journal today gives reasons for caution as we enter 2010, singling out the UK as having the worst fiscal position of all the industrialised nations, noting that, unlike several other headline grabbing countries, the UK does not have either an implicit or explicit guarantee from a friendly nation that stands behind its debt should things take a turn for the worse. 

Given that PIMCO (Pacific Investment Management Co), which runs the largest largest bond fund, have announced that it is cutting its holdings of both UK and US government issues owing to the spiralling debt burden in both countries, it suggests that Sovereign standing is going to be the focus going forward.

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US Greenback ends the year on a high

As we enter the last full trading day of the year, the Greenback has strengthened and trades below 1.59. 

Yesterday's US consumer confidence showed a figure of 52.90 against an expected 53.0, but still up on November's figure of 50.6. On the back of this data the dollar moved over 1.60 but shifted back towards 1.59 levels soon after as thin market trading continued.
 

German consumer price index figures released yesterday afternoon added support to the euro as we saw an increase to 0.8% from an expected 0.7%, up on last years 0.3% and euro/GB Pound fell below 1.11 where it is trading this morning.   

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Wise Money wishes you a Merry Christmas as FTSE 100 nears year high

The UK's FTSE 100 stock exchange index has neared its year high in thin trading on Christmas Eve.

London's index of leading shares was up 8.6 points - or 0.16pc - at 5381.24 at 9.10am, after closing up closed up 43.72 points – or 0.8pc – at 5372.38 on Thursday.

The index is up around 3pc this week and it 21pc since the start of 2009. It hit its year high of 5382.67 on November 16.
 

European bourses were also higher with Germany's DAX and France's CAC up 0.2pc and 0.1pc respectively.

Earlier, Asian markets shrugged off a lacklustre performance on Wall Street to move higher amid expectations China will maintain loose monetary policy.

China's Shanghai Composite Index gain 79.63 points, or 2.6pc, to close at 3,153.41 and Hong Kong's Hang Seng climbed 188.26, or 0.9pc, to 21,517.

Japan's Nikkei 225 stock average rose to a fresh three-month high as the yen's recent weakness lifted exporters amid thin Christmas season trade. The index gained 158.89 points, or 1.5pc, to 10,536.92, the highest finish since late September.

Most other markets gained, including Seoul's Kospi, which added 1.3pc, and Taiwan's Taiex, up 0.8pc. On Friday, markets around the world will be closed for the Christmas holiday though Japan and China will continue to trade.

A surprise 11.3pc fall in new US homes sales in November to their lowest level since March, confounding economists who had expected an increase, was offset by a 0.4pc rise in personal incomes in November — the fastest rate in four months — helped by higher wages. 

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Financial markets wind down for Christmas

Financial markets get more and more illiquid and technicals become more and more relevant. 

To that end, Euro/Dollar remains the driver for forex markets and the target is very much the 200 day moving average level of just below 1.4200. 

Given the current penchant for buying Dollars, this looks a better than evens bet today. The turn in the dollar to date comes from a better relative economic performance than other majors, rather than any concern that the global recovery will derailed. 

As such, we should not necessarily be seeing weakness in high yield commodity and emerging currencies. Certainly the renewed strength in the dollar may be discouraging funding carry trades out of the dollar, and renewing the case for funding out of the JPY or even the EUR, but it suggests a broad carry trade unwind is unlikely to last. 

The recent improvement in the US Dollar against other major currencies reflects the relative rise in US bond yields. 

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UK GDP data revision disappoints

The financial markets remain very illiquid and so reasonably volatile. 

Equities had a strong day with oil perking up ahead of expected positive revisions to today’s GDP numbers from the US and the UK. 

In fact the UK GDP came in lower than forecast at -0.2%. This disappointed the markets and sterling fell against the major currencies and briefly dipped under the key 1.60 level against the USD.

The US figure should not be much different from the previous estimate of +2.8% leaving the afternoon session very subdued.

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Warnings from both the Bank of England and the ECB

The warnings reflect that the Banks in their respective domains are likely to need to report further write downs and should therefore raise additional capital while the ‘going is good’. 

On the back of an already weak Euro, this caused a further dip in its value on opening this morning. Tough talk from ECB member Nowotny didn’t alleviate any European concerns. 

Having just sorted out problems in a few Banks in his own native Austria, he was less than accommodative in his remarks about indebted nations within the Eurozone. He said that there will be no carte blanche bail- out of countries suffering beneath the burden of massive borrowings with his comments assumed to be directed towards Greece and its ever increasing problems. 

His policy view though was very dovish, saying that there was no need to raise interest rates and that Governments shouldn’t be looking to exit banking support measures. 

Euro/Dollar though, dipped to 1.4280 on market opening and after bouncing, revisited this level again in early London trade. 

The next real support for the Euro looks to be at the current 200 day moving average, which is presently at about 1.4170, and with the SNB still sniffing around in Euro/Swiss at levels below 1.5000, it might be that this will be a move too far and that we will see a bounce for year end.

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The US Dollar rally continues

The US Dollar index- which measures the strength of the USD against a basket of currencies hit a 3 month high as the Dollar extended its recent rally. 

However the motivation for the rally shifted- previously the US Dollar gained on the back of recent positive economic data in the form of retail sales and payroll numbers. 

Yesterday it was more a case of good old fashioned risk aversion creating a demand for the safe haven US Dollar. A more upbeat statement from the FED may also have helped as they slowly turn more hawkish, however it was a clear case of risk off that drove the US dollar higher yesterday. 

The problem is that a weaker Dollar will have contributed to better economic data and now the USD is gaining we could see future economic feedback stuttering.

Looking at current levels EUR/USD has now fell back to 1.4380 and hit a low of 1.4304 a level not seen since September. The euro is still struggling on structural weaknesses within certain nations in the 16 nation zone. 

GB Pound/US Dollar also fell into 1.60 territory before creeping back to 1.62- a fall in BRC retail sales was not good news for the UK economy and this number on release caught the market off guard with sterling dropping sharply.

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Euro weakness continues

Since the beginning of December the euro has shed 500 points against the US Dollar.

Recent problems in Greece and Austria and further structural problems within the eurozone are zapping confidence. In a nutshell along with recent problems within Greece and Austria, you also have concern over Italy, Spain and Portugal and exposure in Eastern Europe.

Take this alongside a strong euro and expanding deficits and you have forward looking issues which are shaking investor confidence. To add to the woes of the euro, the USD has had a fine run in the last week being largely supported by stronger economic data.

Tonight we have the US interest rate meeting from the FOMC and based upon the recent turn of fortunes for the USD the market will be looking for a hawkish statement. The key levels should a more positive statement occur would be 90 on USD/JPY and 1.45 on EUR/USD for the USD to break through.

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Euro even weaker than Sterling

The euro has again moved lower against the majors and in particular against the US Dollar moving down to 1.4523 overnight and overall down 500 points from recent highs. 

The cause of the downturn has been attributed to the recent jitters in Greece and more recently in Austria. 

The Greek prime minister commented yesterday that Greece does not have much time and must take tough decisions within the next three months- decisions that have been left for decades.  

In a very direct address he stated that “we must change or sink” and vowed that he will tax the bonuses of Greek bankers by 90%- move over Alistair Darling!

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Markets dry up for Christmas

As we get into December, so markets become less and less liquid.

This, combined with the lack of any significant data on Friday, left the technical traders very much in charge. 

Euro/Dollar obeyed the charts almost to the Nth degree with the closing support at 1.4610 holding even though we had seen slightly lower in late afternoon trading. 

Having broken the early November low of 1.4626 we are left with some fairly definite support and resistance levels to look at between now and the end of the year. 

There has been a considerable amount of trade around the 1.4700 level and this looks to be the initial Euro resistance level with last week’s high of 1.4780 the next resistance level. 

In a nutshell, if we don’t back up through 1.4800 in the next few days then the downside beckons. 

Recent moves suggest that short term trading will focus on being short of Euro with a target of 1.4450/1.4500 on the cards. This directional trade has been given impetus by what appears to be an improving relative economic performance from the US, which is in turn giving the Dollar a modicum of support.

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Market appetite for risk continues despite warnings

Concerns over sovereign default following the recent negative actions from the 3 largest ratings agencies had caused bond prices in the nations concerned to collapse and their yield spreads over the perceived stronger risks to widen. 

This occurred for Dubai, Greece, Spain and Portugal on Wednesday and was followed by a massive sell off in UK Gilts yesterday (after investors re-assessed just what Alistair Darling had said, or not said, in his pre-budget report).

Since then however, there has been an element of retracement in European markets (partially following a comment from German Chancellor, Angela Merkel, that Europe has a responsibility to support Greece) and likely to be a bounce in Gilt prices this morning after a senior Moody’s analyst, at an Asian event, was quoted as saying that there were no plans to revise either the US or the UK triple-A rating.

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Darling does nothing to repay his overdraft

So the pre-budget came and went yesterday and the economists and the politicians digested it in earnest. 

Naturally there was a heavy focus on the report due to the impending election and also the dire health of the UK economy. We saw a one-time 50% tax on bank bonuses that exceed £25,000- this expires on April 5 and does not include contractual agreements…lots of bonus payments to be made on April 6 then! 

Hard to know the intention here as it is easily sidestepped and avoidable and not likely to raise a jot to reduce the deficit or deter the bonus culture going forward.

From a market perspective other measures including an increase in National Insurance and a public sector freeze on pay limited to 1%, leave the ability to reduce the deficit in half within 4 years looking very doubtful. 

Sterling has not reacted too badly however but going forward I feel the words “deficit”, “credit rating” and “downgrade” will be heard more and more to the detriment of sterling.

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UK Pre Budget Report dominates today

All eyes will fall today on Alistair Darling’s pre-Budget report.

For the Foreign exchange markets close attention will be paid to the repayment of debt and growth forecasts along with the potential for a tax on UK bankers’ bonuses. 

All will be revealed later but the sentiment seems to be turning sterling negative as sterling has been sold off this morning against the Yen and USD. Today we have seen the UK October trade deficit widen to 7.1 billion against the forecast of 6.85 billion- not good timing for the chancellor as he looks to solve this ever growing issue. 

Other data from the UK confirms that whilst UK consumer confidence has come in positive, UK manufacturing output has stagnated in October and the British Chambers of Commerce downwardly revised its GDP expectations for 2009 and 2010. 

They are forecasting a 4.6% decline for GDP in 2009 and the 2010 outlook was lowered to 1% from 1.1%- it will be interesting to see how these forecasts align with that of Alistair Darlings later.

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US Dollar bounces on employment figures

The surprise US non farms payrolls that came out on Friday took centre stage. 

A reading of -125k was expected but the actual data came out at -11k. This shook the markets, giving the US Dollar a boost as investors scrambled out of most majors including JPY, GBP and EUR positions. JPY weakened by 2.4 cents, GBP fell 2.5 cents on the day and EUR fell by 2.7 cents. 

The far better than expected payrolls reading showed that US employers cut the fewest jobs in November since the recession began; this positive reading surprised the market and is a strong recovery sign. However, a large portion of the better than expected reading is attributed to the seasonal temporary increases in staff over the holiday period. 

It is not surprising that there is such a strong influx in temporary staff numbers as many companies have aggressively cut their permanent staff in order to cut costs.

The headline payrolls data overshadowed the unemployment rate which came out at 10.0%, whilst this an improvement on last month’s reading (of 10.2%) it is still an ongoing concern to US recovery (the last time unemployment was this high was back in 1983).

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Market confidence resumes

It was back to business as usual in the markets as the search for yield gathered momentum. 

The big loser was the Japanese Yen surpassing the US Dollar as the currency of choice to sell in the thirst for yield. The recent stimulus from Japan and recent verbal attempts to weaken the currency are finally starting to undermine the Yen; USD/JPY is heading back towards 88.00 and GBP/JPY is back up at 146. 

The recovery trade is glaringly apparent again with equities gaining- the Nikkei up 3.3%; Gold hitting new highs and Oil gaining.

EUR/USD is still pushing north although momentum has slowed sue to the market awaiting the ECB rate decision at 12:45 today. As usual it will be the press conference following the decision that will be closely eyed. 

What the market will be scrutinizing is the potential for a shift in the terms that the ECB offers funding to banks on a long term basis- previously a spread of 1% was utilized. What they could look to do is raise the tender or remove it completely and leave it floating- both moves would be considered hawkish and thus euro bullish.

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Dubai still grabbing the headlines

The Dubai furore continues and undoubtedly will do so for some time; the market seems to have contained the news with a rally in Asian stocks and US stocks steady yesterday. 

What we do know is that if Dubai World defaults then lenders will have to take the hit, however the market feels this is unlikely. As UK banks will be the hardest hit in this eventuality, then sterling has remained soft as the USD gives up its gains. Let us see if the pound can start to play catch up today- it is certainly out of the blocks well.

There were other things happening in the world although they all took a bit of a back seat. Most important was the result of and action that followed the Monetary Policy meeting in Japan this morning. Interest rates were, as expected, left unanimously at 0.1% but the market was surprised by the announcement of a Yen 10 trillion injection of funds into the economy to attempt to stave off the ongoing deflation in the country. 

The cash would be introduced to lenders and be backed by JGBs, Corporate Bonds and Commercial Paper. The Yen dipped initially, recovered a tad and then eased again- nothing substantial but a move in the right direction as far as the Government is concerned.

The Reserve Bank of Australia, as predicted, raised their official rate by 25 basis points to 3 3/4% completing a hat-trick of interest rate rises- a first for the central bank. 

The Aussie remained very quiet with both the decision and the comments that followed widely anticipated. The Nationwide BS in the UK this morning released data that indicated house prices had risen by 0.5% in November and a slightly more sustainable 2.7% on the year. 

No real reaction from the FX markets although this data will help consolidate the Pound.

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What will the impact of the situation in Dubai be?

Well so far, nobody is really sure. Given that both Abu Dhabi and the UAE Central Bank have quickly come forward to assure markets of their support for the beleaguered Emirates State, then the financial impact should be quite minor. 

Certainly, there will be repercussions for Western lenders and there is no guarantee that Dubai’s ‘fairy godmother’ will stand behind its liabilities carte-blanche but equity markets are viewing the situation as containable.

The potential problem is any growth in concern over global Sovereign stability and the fact that CDS spreads have continued to widen suggests that even though things look calm on the surface, there is a lot of thrashing about below the surface. 

If things do begin to look a little dire, then expect the Dollar to come back into focus as risk aversion trades re-emerge.

Despite markets starting to draw their horns in for the run up to Christmas, there might be just time for one more spate of trading especially if the support for Dubai offered from the UAE Central Bank is less rather than more. 

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