WISE MONEY

Ben Bernanke head of the US Federal Reserve predictably kept policy on hold whilst reducing forecasts for unemployment and raising expectations for higher near term inflation. The US economy is still expected to grow at a ‘moderate’ pace in coming quarters, with the bulk of Fed members predicting the first tightening in 2014 or beyond.

The one concession to markets was the fact that the Fed is ready to do further in terms of policy development if required.

This helped to boost risk assets overnight leaving the Greenback on the back foot.

Headline releases are thin on the ground today leaving markets to consolidate gains in a relatively ‘risk on’ environment.

Sterling came plummeting down from its summit following yesterday’s news that the UK economy entered a technical recession after GDP unexpectedly contracted by 0.2% in the first quarter of the year.

Nevertheless, the fall was short lived, with Cable improving from its losses, helped by a superb reading for UK Nationwide consumer confidence in March.

However, Nationwide cautioned that the spring in confidence may be brief and therefore cautious of reading too much into this.

Sterling gains against the euro look as though they have reached its limit.

Finally, there was no adjustment in policy from the Royal Bank of New Zealand as expected, with policy rates on hold at 2.5%.

However, governor Bollard did endeavour to talk the kiwi lower while stressing worries about the international outlook.

Concerns about kiwi strength will raise the spirit of FX interference though it may also mean a delay in rate hikes.

The announcement was fairly encouraging on the domestic outlook too.

Even though rates are ‘appropriate’ according to the RBNZ there is a good chance of a rate hike in Q3.

The NZD ignored Bollard’s comments, firming on the back of improved risk appetite.

UK Q1 GDP has come in at 0.2% which means the UK is confirmed in a technical recession (the final GDP figure is out later in the month). The news has trimmed 50 points from Cable and Sterling-Euro in quick time and will keep the Pound on the back foot for the rest of the day.

As we thought it was the construction sector that dragged the number down, showing a decrease of 3% in Q1 2012.

Eurozone data is light today so the focus will remain on the politics of austerity and how it continues to disrupt single currency governments.

With the Dutch cabinet resigning at the beginning of the week, the uncertainty over the outcome of the French election and German Chancellor Angela Merkel facing open rebellion by other European nations over her demand for further austerity, euro sentiment is taking a beating and dragging the euro lower with it.

Today marks the end of the two days FOMC interest rate meeting in the US.

It is expected that the Fed will keep rates and QE on hold, but as ever, it will be what the Fed indicates it will be doing over further easing later this year that moves the markets.

Wording will be key, but we can expect the Fed to continue to the cautious optimism tone of recent meetings.

Also later today is the US durable goods order figure, with consensus estimates showing a decline of around 1.5% in March?

Yesterday European shares and the euro came under renewed pressure after confirmation that Spain’s economy was again in recession and German PMI for April was unexpectedly down. To add fuel to the growing fire the Dutch PM and entire cabinet resigned piling political worries on top of economic woes.

Along with a steep fall in shares we saw spreads widening between struggling sovereign Euro economies and Germany, in addition the Dutch/German spread widened.

Lots of risk aversion in afternoon trading yesterday with the main benefactors being the US Dollar and the Japanese Yen.

Today we have started a little brighter and bond spreads have narrowed slightly from yesterday- the main reason for this is that Dutch, Spanish and Italian bond auctions all went well helping to firm up the Euro from yesterday’s lows.

The main take from yesterday is just how quickly things can turn sour and this highlights the fickle position of the ailing euro.

Today we have seen UK data in the form of public sector net borrowing which showed that the government borrowed more than expected for March but still met its annual target.

Tomorrow we see the crucial preliminary first quarter GDP data.

We have seen some bright sparks in the UK economy of late in relation to unemployment data and retail sales.

However the data has been inconsistent and we have seen a weak performance in the construction sector which could lead to a negative number.

Tomorrow’s number if negative would be a huge blow psychologically to the UK’s recovery and will undoubtedly hit confidence in the UK’s recovery strategy and the pound.

Conversely if we see a stronger than expected number we could see the Pound rally further after a strong performance recently.

The International Monetary Fund’s (IMF) has raised an additional £268 billion ($430 billion) for the pot meaning another set of support for the eurozone when it will be required.However, several other uncertainties persist to bother markets signifying that any rally could be short lived.

There is plenty of data and events this week including central bank decisions in the US, Japan and New Zealand.

In addition, US corporate earnings will stay under the spot light while bond auctions in the eurozone will also provide market drive.

It is doubtful that the Fed meeting tomorrow and Wednesday will incite any change in the currently low FX volatility atmosphere given that strategy settings will stay unchanged, with the bulk of FOMC members likely to look for the first alterations at the earliest in 2014.

The Fed as a result is unlikely to stir the Greenback out of its daze and if anything a fall in durable goods orders, little change in new home sales and a pull back in consumer confidence will play in support to Dollar bears over the coming week.

Even a relatively firm reading for Q1 GDP will be seen as backward looking given the slowing expected in Q2.

Over to Europe and the single European currency will have to compete with political proceedings as it absorbs the outcome of the initial round of the French presidential elections.

The reality is that the political course will carry on to a second round on 6 May which will act as a limit on the euro.

A variety of ‘flash’ purchasing managers indices (PMI) readings and economic opinion gauges will present some primary direction for the Euro but mostly stable to softer readings suggest little stimulation.

As a result euro/ US Dollar will largely remain within its recent range although news from Spain and Italy and their debt markets will have the potential to bring into play larger moves against the euro.

The UK has offered just under £10 billion in loans to the International Monetary Fund (IMF) to help economies in trouble.It is part of a global effort to bolster the fund’s lending capacity, which IMF managing director Christine Lagarde wanted to increase by £250 billion ($400 billion).

The UK is not alone in funding the lifeboat. Japan will contribute $60 billion, Australia $7 billion, Singapore $4 billion and the Republic of Korea $15 billion.

The IMF had already received commitments of $320 billion.

Finance ministers from the G20 group of leading economies discussed boosting the IMF’s resources at a meeting in Washington.

Mr Osborne said the loan was important to the UK: “It’s in Britain’s interest that we have a stable and strong world economy – that creates jobs in Britain.”

He added that any loan made would bring in a return in the form of interest.

He can lend up to £10 billion without parliamentary approval because Parliament has previously approved £40 billion of loans, of which only £30 billion has so far been committed.

But this latest pledge is unpopular with some members of Mr Osborne’s Conservative Party, who had been urging him not to sign up to an increase.

Backbench MP Peter Bone described the decision as “bonkers”, describing any efforts to prop up the eurozone as a waste of time.

The UK Independence Party leader, Nigel Farage, said: “[Mr] Osborne must tell the IMF that he will not donate one more penny piece to the failed euro bailouts.”

The Treasury says its contribution to the IMF is not public spending. All UK loans to the IMF are financed from the UK’s Official Reserves, remain UK assets and do not contribute to public sector net debt.

The IMF hopes that if private investors think that countries in trouble can be rescued if necessary, they will be more willing to lend to them and any funding problems will not escalate.

It has already warned that the eurozone’s debt crisis poses the biggest threat to the global economy, and warnings about Europe are expected to top the eventual communique from the meetings.

The cost of borrowing for Spain has jumped above 6%- increasing fears of a bailout.The yield on Spain’s 10 year bonds reached 6.1%, ahead of auctions of debt on Tuesday and Thursday that could be increasingly expensive for Spain.

Investors have been worried by data showing Spain’s banks are entirely dependent on emergency ECB loans.

In comparison, the yield on 10 year bonds from Germany- the eurozone’s strongest economy, is only 1.73%.

Spain is suffering from a deep economic slump brought about by a bust in its property and construction markets and over spending by the autonomous regions on health and education.

The rise in Spanish bond yields adds to the evidence of storms returning to the eurozone.

Interest rates of over 6% are not affordable if sustained indefinitely, though Spain is still below the 7% threshold that has sometimes been seen as triggering the need for a bailout.

There are also worries that the government might face a large bill to prop up the country’s banks, which made heavy losses on loans to property buyers.

The Bank of Spain said recently that the county’s economy contracted in the first quarter of the year – but it did not say by how much. The economy shrank by 0.3% in the three months to December, so this additional contraction implies that Spain’s economy is in recession.

On Friday, the Bank of Spain – the central bank – said its net lending to its banks in March had risen to 228 billion euros (£188 billion), up from “only” 152 billion euros a month earlier.

The big jump was mainly due to a second auction of three year emergency loans carried out by the European Central Bank, which has given 1 trillion euros to banks since December.

This money was intended to be lent by the ECB to national central banks, which is turn lent to commercial banks who would buy their country’s debts and bring borrowing costs down.

But these loans are creating their own financial headaches- as Spanish banks are now sitting on rising loses as spanish government debts fall.

Italian borrowing costs soared yesterday following new concerns about their ability to reduce its high levels of debt. In the latest auction the Italian government paid an interest rate of 3.89%- up from 2.76% last month and this has been against the recent trends but investors are becoming increasingly sceptical over Italy’s and Spain’s ability to reach deficit targets.

As a result newly elected governments in both countries have announced austerity measures to reach strict debt reduction targets.

Coupled with these figures, Greece published its latest unemployment data yesterday indicating a further rise with the overall rate pushed to 21.8% up from 14.8% at the same point last year.

Despite the bad news the euro remains towards to the higher of its recent trading range against the US Dollar currently trading in the high 1.31s and Sterling trades just above 1.21 at 1.2104.

So far this morning China has published its latest growth figures revealing the world’s second largest economy has grown at its slowest pace for nearly three years.

GDP increased by 8.1% down from 8.9% in the previous quarter and below expectations of 8.3%.

The numbers are being blamed on the fall in demand for exports from the Europe and the US and consequently we could see risk assets hit hard today.

To end the week we have the Michigan confidence figure, which assesses consumer confidence on personal finances, business conditions and purchasing power based on telephone surveys and provides a real time assessment of US consumer sentiment.

The eurozone is still heavily under the spotlight as Spanish and Italians’ debt interest rates are still dangerously high.However sentiment that the ECB could resume emergency bond buying has helped to ease fears.

The euro still remains pegged toward 1.31 against the US Dollar and 1.30 remains a key support area for EUR/USD and given the consolidation at 1.31 we could see some recovery towards 1.3150 to 1.32.

The Pound on the other hand is going from strength to strength and has hit a one year high on a trade weighted index- that is the Pound as a measure against a basket of currencies.

The Pound initially edged higher against the euro in line with euro concerns and improved economic numbers from the UK.

Sterling however has not managed a sustained push higher against the euro. This suggests a lack of appetite to sell the euro too much as the market adopts a wait and see approach to the developments on Spain and Italy.

In other news the yen fell for a second day against the dollar and euro after Bank of Japan Governor Masaaki Shirakawa indicated further easing of monetary policy.

Later today we see further feedback from the US with initial jobless claims and the producer price index- with markets in risk off mode and following weaker than expected payroll numbers last week a good set of numbers is hoped for.

The spotlight is returning to Europe after a brief period of calm. The spread between the benchmark German 10 year bond and its Spanish and Italian counterpart’s widened on continued bearish data and rumours that GDP estimates across the southern Mediterranean countries will be sharply revised downwards.

The uncertainty remains whether the eurozone has enough left in reserve for when Spain or Italy need emergency rescue loans.

The worry is dragging down equity markets from recent highs along with risk currencies like Sterling and especially the commodity currencies which have been the main casualty of recent risk aversion.

There are several bond auctions in the eurozone today; Germany and Italy tap the well for smallish amounts of €3 billion and €5 billion respectively.

There will be strong demand for German debt as ever, but with the problems from last week’s Spanish auction fresh in the mind today’s offering from Italy will be closely watched for overall demand and also the price the market charges the Italian government.

The ECB meeting is on Thursday this week where it is unlikely that they will make any changes to interest rates or the special liquidity measures.

With risk sentiment waning, extra importance will be given to the Chinese GDP data due on Friday.

The data is expected to be around the magical 8% level, as it always seems to be.

Anything lower would be a real shock and compound the bearish trend we’ve followed this week.

According to the Royal institution of Chartered Surveyors (Rics) the number of potential new house buyers placing enquires increased during the month of March. The survey revealed that compared with February 9% more surveyors reported an increase in interest.

This was credited to the warmer weather and buyers looking to purchase ahead of the stamp duty holiday end date.

Despite this news house prices around the country (except London) continued to fall although some were considered “modest” according to Rics.

Over to Europe and Greece’s economic worries continue to dominate headlines with latest industrial output data falling again according to figures released yesterday.

Coupled with weak output, unemployment data due out on Thursday is expected to indicate another rise adding to the fears over Greece’s ability to recover.

Furthermore Portugal was forced to go cap in hand to the European Central Bank (ECB) borrowing over €56 billion last month.

Despite borrowing costs falling during March from a high of over 14% to just over 11%, these gains have now been given back based on this news and the yield on 10 year debt currently sits at 12.2%.

As we look ahead to this four day week due to the UK bank holiday, we are light on headline data.

However key events are the ECB monthly report and UK trade balance figures on Thursday morning.

And to end the week on Friday we will get inflation reports from Germany and the US where we expect to see YoY figures of 2.3% and 2.7% respectively.