WISE MONEY

The UK’s Q4 final GDP has come in at -0.3% which is lower than the expected -0.2% and is a disappointing number for the Pound which has faded lower this morning against the euro and the US Dollar.  The number is not a great surprise but more of a disappointment and will heap pressure on the Q1 2012 GDP to come.

The US Dollar remains somewhat on the back foot following Fed chairman Ben Bernanke’s dovish tone earlier in the week with rhetoric suggesting more QE could be required and the loose monetary policy stance is here to stay despite a sustained run of positive economic data.

The USD has managed to claw back a little overnight against the EUR and the GBP- this corresponds to a move out of risk on weaker Chinese data.

Elsewhere risk currencies such as the Australian Dollar have come under pressure overnight as further concerns of a slowdown in China have dampened demand for risk currencies.

February’s industrial sector profit fell 5.2% year to date, the markets will be closely watching the situation in China.

Essentially China and the US are the key drivers behind global growth and any signs of slowing growth will turn the markets into risk off mode benefitting the safe haven shores of the USD, JPY and CHF and weakening risk on commodity based currencies such as the AUD & South African Rand.

Yesterdays appealing comments by Fed Chairman Bernanke, in addition to better than expected results for German IFO business confidence last month, have boosted risk assets whilst weakening the Greenback against Sterling and the euro. Markets appear to have shaken off, at least for now, growth worries stemming from weaker manufacturing confidence surveys in China and Europe last week.

The S&P 500 climbed 1.4% to 1,416.51, its highest close since May 2008.

The Dow Jones rose 1.2%, while the Nasdaq gained 1.8% to close at 3,122.57, its best finish since November 2000.

Ben Bernanke continued his stance that supportive monetary policy is still necessary particularly given worries about the jobs market and additional QE may still be needed.

Today markets will focus on US and French consumer confidence coupled with bill auctions in Spain and Italy. US consumer confidence is likely to slip slightly while the bill auctions are likely to be well received.

Sterling has failed to maintain gains above 1.59 against the Greenback over recent weeks let alone manage to test the key psychologically level of 1.60.

Therefore the current move above 1.59 could be a short one.

For the break above it will require an improved downtrend in the Greenback motivated by a sharp enhancement in risk appetite and/or a drop in US bond yields for Sterling to move much higher.

Both are unlikely.

Sterling will be susceptible to a general stronger Dollar for the rest of this year but could outperform against the euro.

The euro currency is enjoying a healthy bounce after the completion earlier in the week of a further Greek bailout to cover March debt obligations and through positive German data. Data from Germany showed that GDP had shrunk in Q4 by 0.2%, however strength in recent ZEW and IFO surveys suggest that the economy will escape falling into recession.

The euro was also helped by good news from over the pond as weekly US jobless claims came in unchanged at 351k and this level remains the lowest since 2008. This number has helped to boost the expectation that the approaching Non Farm Payrolls on Friday 9 March will better than market expectations.

Recently US data has started to show signs of improvement as the powerhouse that is the US economy looks as though it is slowly clawing back to growth.

For the markets this improves the appetite for risk and currently this is USD negative.

We have seen EUR/USD especially push higher and test 1.34- the highest level since December, GBP/USD has also edged higher but the pound remains a little subdued.

Wednesday’s MPC minutes helped to put a dampener on the Pound as expectations rose for further QE in 2012- probably in May.

With inflation falling and economic growth struggling then QE remains very much on the table with a cocktail of low interest rates to remain.

The Pound has fallen on the back of this market feedback and is struggling to gain momentum even in a sentiment which has turned risk on.

Wise Money says keep your hard hats on-  the crazy levels of volatility across the FX markets will continue today as we look forward to the US employment number this afternoon. It will be nice to get back to economic data driving moves in currencies, given trading has been totally dominated by central bank announcements and political news hitting the wires.

In no particular order, the market moving events have been US Fed Chairman Bernanke speaking yesterday, the Chinese premier suggesting they may invest further in the European bail-out fund (after a quick whisper in the ear by German Chancellor Angela Merkel) and the will they won’t they saga still playing out over Greece.

Throw some disappointing American data into the mix, stir together and sit back and watch the Euro-Dollar move like a yo-yo.

The Bank of England arch dove Adam Posen has long argued for more QE before it became fashionable again, and he suggested yesterday than the Bank should not stop at buying Gilts in the easing process.

Mr Posen thinks corporate debt should be included in the debt the bank buys, as the current mechanism supposed to lower rates on corporate debt is broken because the banks just park newly minted cash on their balance sheet and shun assets perceived as higher risk.

The BoE are expected to announce another £50 billion of QE at their meeting next week, but it will be gilt only.

It will take time, a considerable change in thinking in the Bank or a serious deterioration in the economic climate in the UK for Mr Posen to get his way.

The expectations this afternoon are for the US economy to add around 150,000 jobs in January, lower than December but expected by the market because of the effect Christmas has on the job market.

As we mentioned before, the way the US Dollar reacts to positive data is changing from risk-on, risk-off to the complete opposite, where the Dollar rises on positive data.

Trying to guess which way the Dollar moves this afternoon is becoming increasingly difficult, which means trading will be choppier than usual in the build-up and immediately after the announcement.

The Bulls charged back into the money markets ring yesterday as they took a more optimistic view on global growth, in addition concerns on the euro zone debt crisis eased.   The move into risk was prompted by a series of positive manufacturing reports from around the globe, in particular China’s PMI data remained positive.

The Pound was bolstered by a rise in manufacturing activity for the UK last month showing output expanding at the fastest pace since March last year- this helped the Pound hit a 2 month high against the US dollar.

In fact the US dollar lost across the markets, a rise in US manufacturing activity alongside China’s data helped swerve the markets into risk on mode which is US Dollar negative.

Not surprisingly the US Dollar lost against the usual suspects- the Pound, Euro, Australian dollar and other commodity based currencies and emerging market currencies.

Surprisingly the US Dollar was also down against the safe have Yen and Swiss Franc-  this was due to nervousness on the threat of intervention by the Bank of Japan and the Swiss National Bank.

The current USD/JPY levels are very close to previous levels where the BOJ intervened in October.

In addition EUR/CHF is dangerously close to the 1.20 peg- currently trading at 1.2045- the SNB has said that it will intervene to weaken the Swiss Franc at the 1.20 level.

One to watch for the remainder of this week.

The euro continues to underperform especially against the US Dollar and the Japanese Yen- where it hit a two month low. There is a growing concern that rating agencies will downgrade European sovereigns in the near term.

In addition the lack of a clear plan moving forward from the EU summit is denting confidence in the single currency.

The market was also fearful in advance of this morning’s bond auctions from euro sovereigns- it is understood that appetite was ok but there was rumours of a little help from the ECB.

Asian stocks have also declined in line with the growing concern for Europe.

The key level for EUR/USD is the 1.31 barrier- a move below this level could open the door for a push under 1.30; this would help GBP/EUR push towards the key 1.20 level.

Data from the UK was largely ignored with UK CPI coming in for November at + 0.2%, that is + 4.8% year on year- this was largely in line with expectations.

Following last week’s isolation from Europe- so far the Pound has reacted positively.

The Pound could actually perform better moving forward; last week we saw the European Central Bank cut interest rates again and we now have the threat of downgrades for European sovereigns.

One aspect the UK government has managed is to be clear in their strategy to the markets- the austerity plans for the UK have been very clear for some time and this has helped to sure up the UK’s AAA status.

It may transpire of course that enforced austerity was the wrong call but for the markets the UK has embarked on a course of action with clarity.

In the eurozone it has been a prolonged mess and we are still no nearer to seeing a full solution- this could spell further problems for the Euro and as a result the Pound could shine.

The UK markets are AAA, have high liquidity and recently bond yields have fallen indicating more demand as a safer shore.  In the unlikely event that the Bank of England ceased their QE programme, then the Pound could come to life.

After the blow to the euro following the Standard and Poor’s ratings news on Eurozone countries, the currency has managed to regain some form of stability ahead of the EU Summit commencing tomorrow. Hopes that the Merkozy French -German deal which was publicised on Monday will be finalised at the summit are high and the threat by S&P means that the stakes are getting higher should there be a halt in progress this week.

Apart from placing the ratings of fifteen Eurozone countries on negative watch, S&P stated that the EFSF bailout fund may be downgraded too.

The single European currency however, looks to have found form in advance of the summit and the ECB meeting tomorrow, as news of talks to structure the bailout fund into two separate forms looks to strengthen the currency.

In other news the decrease in the Royal Bank of Australia’s new cash rate applied further pressure on the Aussie.

It’s fair to say the timing of the cut was not fully expected however the Aussie drop was restricted by the somewhat neutral RBA policy report.

The announcement did not support the idea of additional easing in the months ahead coupled with the much firmer than expected Q3 GDP this suggests that markets are too dovish on Australian interest rate expectations.

The Euro has continued to fall lower against Sterling in recent times whilst teh Pound looks to have settled into a range.

Sterling sentiment has clearly deteriorated over recent weeks as reflected as the market looks to becoming increasingly short.

The Pound has not been helped with a run of particularly poor data  and yesterday’s UK house price data was no exception, indicating a fall in November house prices alongside retail sales which dropped more than expected.

We are set for an extremely busy and important week for the eurozone.The main event looks set to be the announcement of a deal on fiscal union between member states on Friday night, but what the market expects this deal to look like and what the deal actually looks like may well turn out to be two different things.

What the euro needs is further fiscal integration between members with the plan of a centralised treasury to eventually raise and distribute taxes.

What the French and Germans are likely to propose is the fiscally stronger countries get a greater say in how the weaker periphery run their economies.

Thursday sees the ECB monthly meeting, with another reduction in interest rates expected.

ECB head Mario Dragi has also hinted in a recent speech of large scale bond purchases by the bank.

The much softer tone suggests a deal on government budgets might be closer than the market thinks.

Keeping with all things Europe, we also have a large amount of data to digest this week including eurozone retail sales, German CPI and the closely watched ECB monthly report which will detail the size and scope of lending to European banks by the central bank.

Sterling continues to hold its ground versus the euro and Dollar despite the dire announcement by the Chancellor last week, who downgraded his growth projections for the UK economy.

The resulting changes to the UK outlook now mean the Government will not balance its books until 2016 at the earliest.

The reason for Sterling not pushing lower in the face of a worsening outlook is probably that it is the least bad option in the face of the continuing European problems and the potential for QE3 in the US.

That said the Bank of England looks set to announce an increase to its own asset purchase scheme on Thursday at the MPC meeting.

Governor Mervyn King was in very gloomy mood as his announcement the Banks financial stability report last week and it is likely that the BOE will take action this month rather than waiting for the New Year.

Fairly dovish comments by Bank of England officials and weak data will keep the Pound on the back foot over the short term. BoE governor King highlighted the risk of an inflation undershoot while Fisher noted that the BoE expanded QE by a minimum in October and can do more.

Yesterday’s Autumn statement was a mixed bag for the markets.

George Osborne announced two more years of austerity measures following official figures indicating that the national debt was spiralling out of control due to rising unemployment and flagging economic growth.

Fitch reacted by suggesting that the UK was now the most indebted AAA country in the world with the exception of Uncle Sam who lost their full status earlier this year.

The Greenback was dealt a blow by Fitch, the rating agency, as they changed their outlook on the US AAA long term rating to negative.

Nevertheless, Dollar reaction has been strong, with long positioning moving to multi week highs.

The Dollar could face a struggle from the rumour that the Fed is about to embark on a fresh round of QE by buying mortgage backed securities.

The strong start to the week in terms of risk appetite aided a brief Euro rally but the currency remains susceptible to event risk.

High among them the Eurogroup and Ecofin meetings this week, which will decide whether or not to approve Greece’s next loan tranche as well as EFSF leveraging options.

Development is expected to be restricted leaving the euro defenceless to a fall.

Under the spotlight today will be Italy’s sale of up to EUR 8 billion of Italian Bonds and the likelihood that the country may have to face a yield above the critical 7% threshold.

An increase in funding costs will not bode well for EUR sentiment especially following warnings by Moody’s about potential downgrades to sovereign ratings across the region.

At the time of writing there are rumours of ECB again getting involved in bond purchasing.

EUR/USD failed to follow through on gains overnight but as reflected in the IMM; speculative positioning may have some scope for further short covering given that the net EUR short position reached its highest since June 2010 last week.

Nonetheless, upside potential for EUR/USD is likely to be restricted to resistance around 1.3415.

The Italian treasury released a small positive for the global markets this morning by announcing good demand of their latest bond auction. With the Italian debt market being the most closely monitored amongst all of Europe, these comments brought some relief to the recent run of weakness in the single currency.

The euro is by no means out of the woods, but at least it is potentially the start of a period of euro stability.

This followed yesterday’s reports that the IMF is planning a €600bn package to help Italy and a credit deal for Spain could be in the pipeline.

These rumours were played down by IMF Chief Christine Lagarde who stated that “the IMF can only make loans available when a government asks for them” and as yet, Italy hasn’t.

The euro has strengthened slightly off the back of this news though we are very far away from a long term resolution so any real gains for the single currency are unlikely in the short term.

Reports out today stated that the UK will fall victim to a second recession.

The consensus, by a leading economic forecaster warned that the rise in unemployment will further damage Chancellor George Osborne’s hopes that he will be able to meet his deficit reduction target.

The figures will make grim reading for the chancellor, who will deliver his Autumn Statement today.

This is followed by more bad news for the UK recovery with millions of public sector workers walking out on strike tomorrow; a move that will cost the economy an estimated £500m.

The markets will continue to move on any more news from the struggling debt nations and on any bond auction updates from the eurozone.

The week ends with the non-farm payrolls figure from the US which is always viewed as a key indicator for how the global jobs market is performing.