WISE MONEY

The G20 meeting was the non event that everyone was predicting.With any firm commitment over currency reform off the table, the best we got was an agreement to agree – nothing concrete in terms of a path forward and certainly nothing of substance to make sure we avoid a trade war further down the line.

The hope was for a commitment to restrict current account surpluses/ deficits to a percentage of GDP but surplus countries (Germany, China Etc) dug their heels in and even refused to accept such loose dialogue.

Friday’s rumour that Ireland was about to go cap in hand to the EU gathered momentum over the weekend, Irish Prime Minister Bryan Cowen denied that a bail-out was needed, but further comments this morning by Irish officials has left the door open for EU assistance.

German comments suggesting the Irish should accept the bail out to avoid further contagion in debt markets (read Portugal and Spain) spooked the markets and undoubtedly made any market based resolution even less likely.

More poor data from Rightmove continues to show deterioration in the British Housing market, but this has not affected Sterling in the majors very much in light of the larger Eurozone story.

The Bank of England minutes are released on Wednesday (not to be confused with the Quarterly Inflation report last week) showing  MPC voting preferences from the last meeting,  we also have CPI and RPI inflation data out tomorrow which no doubt show inflation still running ahead of its target level of 2% plus or minus 1%.

Finally we have jobless claims, retail sales and public sector debt levels also out this week in a busy one for Sterling.

Today marks the start of a busy week in the wise money markets. A large amount of important data releases are scheduled for release this week and several prominent central bankers are due to speak.

This is set against the backdrop of further intervention by Japanese authorities, aimed at curbing Yen strength and further grumblings by the US of China’s refusal to let the Yuan appreciate to fair levels against the Dollar.

The Greenback is yet to recover from last week’s FED meeting and continues to struggle across the board, this afternoon the Chicago Fed National Activity Index will probably show a further slowdown in economic activity so expect the Euro and Sterling to cling stubbornly onto the gains from last week until tomorrow.

Later in the week US GDP is announced, with forecasts of a slight increase from 1.6 to 1.8 per cent. The Fed & markets will be following the figures intently, as disappointing figures may mark the start of the “exceptional measures” the Fed mentioned in the last meeting.

UK GDP figures are released on Tuesday; again the number is very important to the future path of Sterling, with positive growth vital in the face of the steep government spending cuts just over the horizon.

The fear among some economists is the announced cuts reduce growth below the levels needed to service existing debt payments and we enter into a death spiral of further cuts and further reductions in growth, leading to further cuts.

The UK housing market also showed further signs of slowing, all Britain’s regions showed monthly price declines in the Hometrack Housing Survey.

The FOMC decision and statement from Tuesday evening was still the catalyst of movements in all of the markets yesterday, as Asian and European investors had the opportunity to react to the news. Further US Data also showed that home prices dropped 3.3 percent in July from a year earlier, the eighth consecutive decline, as foreclosed properties flooded the market.

Prices fell 0.5 percent from June vs. a market expectation for only a 0.2% decline, the Federal Housing Finance Agency in Washington said yesterday.

The time it would take to clear the market of homes for sale also hit a 10 year high of 12.5 months.

Over on this side pond, the minutes of the most recent Bank of England meeting, released yesterday, signalled that it’s moving closer to more asset purchases, joining the Federal Reserve in contemplating further stimulus to revive a flagging economic recovery.

That may put both the expansion of the central bank’s 200 billion Pound government bond holdings and buying other securities on U.K. officials’ agenda.

Policy maker Adam Posen last week argued that a “plan B” approach for the Bank of England should be “heavy-duty credit easing.” The Confederation of British Industry also cut its gross domestic product forecast for next year.

The dollar has fallen towards a five week low against the euro before a report today that may show that the U.S. housing market remains weak, adding to evidence that the world’s largest economy is slowing.The U.S. currency weakened versus 12 of its 16 major counterparts on speculation that the Federal Reserve’s Open Market Committee will also confirm that it is considering further measures to keep borrowing costs low at their meeting tomorrow.

In the U.K, data released this morning has revealed that home sellers lowered asking prices for a third month in September, wiping out half of the gains made since the start of 2010.

Average asking prices in England and Wales fell 1.1 percent from the previous month and 3.4 percent over the last three months according to Rightmove, the operator of Britain’s biggest property website. A pickup in the supply of homes for sale is putting downward pressure on prices, while curbs on lending by banks are crimping demand.

Bank of England Governor Mervyn King noted last week that bank balance sheets “are not in tremendously robust shape,” and that this may continue to restrain lending.

The Australian dollar has increased towards a two-year high after central bank Governor Glenn Stevens signalled earlier this morning that policy makers may need to resume raising interest rates should a mining boom stoke the economy next year and boost inflation.

The currency has gained 6 percent so far this month as traders increased their assessment of the chances that the Reserve Bank of Australia will increase their benchmark rate on 5th October to 29 per cent.

We can all agree that the economic data releases at the moment are confusing and clouded in fog. In the UK, the Nationwide survey last week showed UK house prices declining month on month by 0.9%, today the Halifax Survey reports house price increases of 0.2% from July.

Positive consumer confidence figures were followed by disappointing PMI index figures, with the net result that traders have been left bewildered and slightly uncertain and the markets necessarily choppy.

This morning’s releases are no different, industrial production came in lower than forecast and manufacturing production exactly as predicted, but we saw an almost one cent move upwards in Sterling in the run up to the figures, and are in the midst of a retracement back to where we started.

Conflicting data has also been a theme in the US, with the raft of negative data suddenly reversed with positive ISM & employment figures at the end of last week.

What was becoming a clear picture of a slowing US economy and potential re-entry into recession was suddenly muddled slightly with the apparently positive figures. However, investors remain fearful of the stalling US recovery (and impending QE2) with traditional safe haven currencies like the Swiss Franc and Japanese Yen continuing to perform strongly.

The Yen hit the highest level against the Dollar since 1995 yesterday, as the supposedly psychological key level of 84 was brushed aside easily. This afternoon sees Narayana Kocherlakota of the Federal Reserve speak, along with the release of their beige book & consumer credit statistics.

Euro worries have remerged with the  market’s realising the total uselessness of the eurp bank stress tests, and a unexpected drop in the growth of German Exports.

Yesterday was an eventful day for the euro as it made significant gains versus both Sterling and the Dollar. The British Pound hit a 3 week low against the Euro as the UK Manufacturing PMI came in well below expectations at 54.3 in August following a reading of 56.9 in July.

Nationwide house price data out overnight was also disappointing so we may see Sterling remaining on the back foot today.

Robust economic readings in both China and Australia overnight, spurred on demand for higher-yielding assets prompting the Dollar and Japanese Yen to fall against most of their major counterparts.

Australian GDP surprised strongly on the upside at 1.2% q/q, against the anticipated 0.9% q/q. This coupled with better than expected manufacturing numbers in China have led the market to the risk on trade.

Next on the menu for markets to digest is the US payrolls data tomorrow. Despite the ADP jobs report revealed a surprise 10k decline the employment component of the ISM manufacturing survey strengthened to 60.4, leading to an improvement in August manufacturing payrolls.

Ahead of the payrolls release the US data slate today largely consists of second tier releases including July pending home sales, August chain store sales, weekly jobless claims, and factory orders. It is worth paying particular interest to jobless claims given that the four week moving average has been edging higher, suggesting renewed job market deterioration.

The consensus is for a 475k increase in claims, which will still leave the 4-week average at an elevated level.

Sales of previously owned US homes dropped more than expected in July to their lowest pace in 15 years implying further loss of momentum in the States economic recovery.  The record drop of 27.2% from June equates to an annual rate of 3.83 million units which is the lowest level since May 1995 and June’s sales pace was revised down to a 5.26million-unit pace.

Markets had been anticipating a tumble of around 12% and so were shocked with the magnitude of this figure.

The US Dollar dropped significantly against the JPY following the news to a new 15-year low of around 83.60.

This prompted more verbal intervention from Tokyo but made little impact however as investors continue to sell USDJPY and are now focusing on the all time lows of 79.75 from 1995.

Investors ploughed money into government bonds, driving down the implied cost of borrowing to record lows in Britain and Germany.  The UK 10 year gilt yield fell to 2.88% which is even lower than that of March 2009  when the BoE announced that it would buy billions of gilts under its quantitative easing scheme.

US 10 treasury yields broke below 2.5%.  Oil followed suit and fell below $72 a barrel yesterday, down for a fifth day after weak US economic data spread gloom about the ability of the US, oils top consumer, to work through record stocks.

These ripples of doubt ran across the globe and caused equities to close down; Britain’s top share index closed lower with UK banks, miners and energy stocks bearing the brunt of the sell-off.  The FTSE ended down 78.89 points (1.5%) at 5,155.95 which is its lowest close since 20th July and unwound the gains of 0.8% which we had seen on Monday.

China is now officially the second largest economy in the world, after the US.The Japanese GDP data out overnight reflected that China has moved into the lead and a number of economists are forecasting that China will take over as Number One by 2027.

Friday was a busy day on the economic data front. First up, we saw figures released showing that the Eurozone economy expanded in the second quarter at the fastest pace in nearly four-years.

The eurozone’s seasonally adjusted preliminary second quarter GDP showed an expansion of 1.0%, compared with the previous 0.2% and the expected 0.7%. The biggest jump in the figures came from Germany’s GDP, with a preliminary reading of Q2 GDP showing extremely robust 2.2% q/q growth, well above expectations of 1.3%.

This was the fastest pace of growth in nearly 20 years since German reunification. Global demand and a weaker Euro helped boost exports during the period, sustaining growth in the area.

Whilst the UK can take comfort from the fact that they can control their own currency, there are still issues. House prices in the UK have taken a bit of a knock for the month of July according to figures posted by Rightmove, the property website.

The figures reflect that people wanting to sell their homes are having to cut prices faster than at any time this year following a flood of properties hitting the market. On a national basis house prices have come in by 1.7% from July to August.

Following the Bank of England cutting its growth forecast on Wednesday and raising its estimate of inflation this housing data has not helped the continued fear around the risk of a double dip recession.

Whilst recent UK economic data has been extremely positive yesterday this trend was broken. Overnight GfK Consumer Confidence fell by more than expected to -22 (consensus -20, previous -19). This follows yesterday’s news that house prices fell by more than expected in July, coming in at -0.5% m/m (consensus -0.3%, previous 0%).

It appears that concerns about the medium-term impact of fiscal austerity measures on personal finances is outweighing any potential optimism about the recent recovery’s momentum, thus keeping demand low.

In other data, both mortgage approvals and mortgage lending in June fell more than expected and M4 money supply was unchanged for June.

Despite this negative development, Sterling continued its recent surge against the US Dollar and managed to close at levels not seen since February of this year.

Significantly, sterling is well supported ahead of a key technical level, the 200 day moving average of 1.5543.

George Osborne the new UK Chancellor of the Exchequer announced yesterday that he was “changing the way Budgets are made forever”.

He claims that unlike his predecessors he will “fix the budget to fit the figures” and provide tax payers with a greater clarity over the UK finances.

This is ahead of his emergency budget next month when he plans to outline £ 6 billion in spending cuts this year ahead of an emergency budget on June 22.

Sterling hit a 13-month low against the dollar yesterday and continued to weaken versus the euro as data showing a slowdown in UK house price growth raised concerns about the health of the economy.

Property web site ‘Rightmove’ said that asking prices for British residential properties increased at a slower pace for the month of May compared to April suggesting a slow down could be around the corner.