WISE MONEY

Festive cheer in the money market seem to be running out already as we move towards the end of the first trading week of 2012. Disappointing Italian and Spanish PMI data more than offset a decent German figure and the eurozone is looking more and more likely to be heading into another recession.

The euro was under pressure for most of yesterday as risk was dumped and the US Dollar strengthened.

The theme is continuing this morning as the single currency continues to be sold; European banks continue to make headlines for the wrong reasons as they park newly created ECB cash back at the central bank rather than lending or investing it in the real economy.

Retail gloom continues to hang over the UK with many of the retailers reporting crucial Christmas figures this week.

Next shares were pummelled after they reported disappointing sales over the festive period and set a gloomy tone as we wait for results from rivals M&S.

John Lewis were a ray of light in the gloom, posting impressive sales growth compared to last year, but most if not all retailers are suggesting that economic conditions remain a real concern and are expecting a challenging year.

The Pound has opened the year in much the same way as it finished the last, namely taking a back seat to the Euro and Dollar with economic fundamentals remain less of a driver than politics.

The wise money is hoping for a clear sign of the economic picture on Friday from the Non-farm payrolls, either showing the recovery continuing or a worsening picture and the prospect of further QE this year.

More likely is that the number shows the US economy to the chugging along slowly, leaving both the Fed and the markets disappointed.

The euro has opened lower this morning, sitting below the critical 1.30 barrier as markets remain nervous as to the steps that the eurozone will take to curb the crisis. In major trading, the US Dollar managed to gain further strength last week trading to a low of 1.2860 at the end of 2011, which was the lowest in the final quarter of 2011.

Data from the region, saw manufacturing figures come in from France, Germany and Switzerland, which was higher than previous months for all countries, though not reflecting a drastic expansion as it lay below the median figure of 50.

With regional banks stepping up their deposits in the ECB, panic had started to set in, but the announcement from the ECB last week that these deposits were receding, have calmed fears momentarily.

We have had some positive data from Germany, as far as unemployment figures go, pushing the euro towards the critical support level of 1.30 against the greenback.

As we go into the week, we expect further data from Europe on Services PMI and construction figures, which will lend to trading patterns of the Euro, intermittently.

We are straight back into a busy week for the US Dollar with ISM manufacturing out this afternoon along with the minutes of the previous Federal Reserve meeting from the 13^th December.

On Friday the US non-farm payroll number is also released, with the consensus for around 150K jobs being added over the previous month.

Today also marks the official start of the presidential elections with the voting beginning in the first republican primary in Iowa. A victory by the favourite, Mitt Romney may mean the race is over before it began with Mr Romney holding a 20 point lead in the next state to vote, New Hampshire.

The euro pushed towards a 3 week high against the US Dollar as the markets became more optimistic on a concrete deal by the end of the month for Greece and the Eurozone.  IMF officials indicated that Greece will get an 8 billion euro loan next month despite the fact that it will miss key deficit targets.

ECB president Trichet also stated that commitments made by Greece should mean that it can avoid default.

This flurry of optimism does not eclipse a still sceptical market, but it has given a boost to the single currency- so far the euro has pushed up over 1% against the USD in early trade.

Despite the above positives for the Eurozone in other news Slovakia voted no to a legislation to increase the firepower and guarantees for the European Financial Stability Facility (EFSF).

All other countries have ratified the changes but resistance from Slovakia has raised tension.

It is expected that another vote will pass the changes tomorrow- however this is at the expense of the opposition getting their back scratched in a coalition reshuffle.

In addition European banks still remain on alert as Spanish bank Banesto missed its profit targets and the Bank Of Ireland was downgraded.  In a nutshell the mix is now good news/bad news as opposed to bad news/bad news and so the Euro has managed a move to the upside.

UK data was again poor this morning with UK unemployment hitting a 15 year high at 8.1%.

The Pound has still managed to push up against the USD this morning- this is tracking the move higher in risk on EUR/USD and is not due to pound strength.

MPC member Dale noted that the vote for more QE in the UK was due to the UK economy slowing in Quarter 3 and the expectation that it will slow on Quarter 4.

Today’s unemployment certainly backs up this slowdown, however the key test for the MPC is whether CPI will remain above 5% for the medium term as the expectation is that it will fall towards 2%.

Official statistics yesterday indicated that the number of unemployed rose by 80,000 to over 2.5m in the last quarter.According to the Office for National Statistics this was the largest increase for nearly two years leaving the overall percentage unemployed at 7.9%.

These latest figures come as blow to the government as they look to balance job losses in the public sector by created jobs in the private sector.

Chris Grayling said the figures “underline the scale of the challenge we face particularly given the slower growth across Europe and North America”.

He went on to say “The government is taking the steps needed to support growth and rebalance the economy,” said Grayling.

In terms of the long-term jobless, “our new Work Programme is now up and running across the country and will offer flexible support tailored to people’s needs to help them get into employment”.

The ONS also indicated that the numbers were boosted by students leaving their studies for the summer recess.

Over to the other side of the pond and US retail sales came to a halt during the month of August largely blamed by low consumer confidence and Hurricane Irene which hit the east coast of North America.

Initial estimates suggest that overall sales did not grow at all compared to 0.2% and 0.3% in the previous two months.

Biggest falls were seen in vehicles and clothing however Electronics and sports goods helped offset that particular fall.

There maybe some brighter news in the next quarter as postponed sales and repairs following the hurricane could lead to a decent growth figure for the final quarter of the year.

Finally, a developing story from Swiss bank UBS.

Just when you thought that things can’t get any worse- the swiss gnomes have discovered an unauthorised series of gambling positions by one of their staff and early estimates suggest this could lead to a £1.3 billion loss for the bank according to an official statement.

By comparison this amount compares to the entire profits for the whole bank from the past three months combined.

Could be an interesting story over the next few days and an additional headache for the SNB…

The US Dollar continues to suffer as market hopes of additional US Fed stimulus including additional quantitative easing puts increasing pressure on the currency.There may also be some indecision to buy US Dollars before tomorrow’s Non-Farm Payrolls.

Yesterday’s US ADP jobs data were not particularly positive, so this doesn’t bode well for tomorrow’s number.

The Fed FOMC minutes earlier this week suggested there are a few in the committee who are ready to take more aggressive action which would lead to a weaker Dollar.

Ahead of the jobs data today’s August ISM manufacturing survey will offer some direction for markets but if the forecast of a sub 50 outcome proves correct it will only play into expectations of more Fed stimulus leaving the USD to weaken further.

The Euro struggled against the Dollar to break through 1.45 this week but has continued to resist various peripheral bond worries without too much damage, a trend that has been present for the past few months. Despite the fall back, EUR/USD may struggle to sustain a drop below its 100-day moving average at 1.4362.

Sterling has had problems of its own to deal with and has failed to capitalise on any USD tone while losing ground against the EUR.

Data yesterday did not help, with consumer sentiment falling for a third straight month according to the GfK confidence index.

It appears that speculation of further Fed monetary stimulus may also be rubbing off on GBP, with potential for more UK QE likely to act as a weight on the currency.

MPC member Posen added fuel to the fire in comments that he made supporting the need for central banks to undertake more QE.

Sterling looks destined for more weakness in the short term, with support around GBP/USD likely 1.6111 likely to be tested. A below 50 reading for the August manufacturing PMI today, will only add to downside pressure.

The biggest question facing the wise money over the next few months is, what will happen once the Federal Reserve’s QE2 program comes to and end, will they embark on another round – QE3, keep rates low and do nothing, or begin to tighten monetary policy.  The path the Fed is currently walking is narrow and precarious.

The US Non-Farm payrolls is closely watched because the job creation rate is one of the key metrics of the health of the US economy, and given the recent disappointing data flow from America, a below estimate jobs number will force the market into assigning a higher probability to further QE this year.

The Dollar has performed strongly over the past few days, stock markets have fallen as risk is taken off the table and the safe haven currencies have done particularly well. Looking forward to next week we only low level data due, with speeches by Fed broad members set to be the highlight.

The Pound continues to come under pressure in both the Dollar and Euro pairs.

Risk aversion is pushing the Dollar higher versus Sterling and the Euro has discovered some strength after some seemingly positive news over the perceived change of stance by Germany over Greek debt restructuring.

We saw the Pound tumble earlier this week on below estimate Purchasing Managers Index and the weak data is pushing the prospect of any Bank of England rate rise further into the future.

This in turn is hurting the Pound, especially against the Euro with a hawkish central bank. Expect no change to rates or the asset purchase scheme at next weeks MPC meeting. As we mentioned earlier in the week, also watch for more criticism of the Bank to occur as they continue to miss their two percent inflation target.

Risk appetite took a step backwards and the euro dipped in thin trading and with Europe re-joining the fray (although not with any real commitment as yet) it doesn’t appear that sentiment regarding money markets like currencies, interest rates or sovereign debt issues has changed one iota.
Trading sessions in the days around the weekend were light in volume and low in movement with thin US markets almost totally on their own for long periods.

We did see commodities and equities ease as a result of a decision from a major futures exchange to increase the margin for trading silver prompting a wave of profit taking in both silver and gold.

This then filter through to forex trading and, coupled with a comment from ECB President Trichet who said that maintaining a strong Dollar was in the US interest, caused the Greenback to make a bit of a recovery.

Last Friday’s data from the US was on the slightly weaker side of ‘as expected’ with new home sales roughly in line but the Dallas Fed manufacturing index marginally softer.

With the escalation of tensions in the Middle East / North Africa region now encompassing Syria, the Euro has headed back to its last week’s highs, with the Dollar again recording fresh lows against the Swiss Franc as oil once again turns higher.

We are scheduled to get several risk events this week that will test the market’s resolve on its bearish stance for the Dollar.

The first of these is the FOMC rate announcement tomorrow afternoon but more important will be the press conference that follows.

Despite growing concern that 1st Qtr GDP in the US will emerge as softer than originally hoped, expectation is that Ben Bernanke will send a clear signal to the market that the current tranche of QE, scheduled to end in June, will finish as planned.

There is currently no reflection of tightening monetary conditions in the forex market so, dependent upon the tone of the Chairman’s comments tomorrow, there appears good potential for a stronger Dollar going forward.

The surprisingly better than expected US unemployment figures on Friday will likely switch the debate further towards a hawkish stance within the Fed. This week there is little to match the significance of jobs numbers in terms of market moving data this week. However, all eyes will be on the raft of Fed speakers over coming days coupled with the minutes of the FOMC meeting.

The Fed speakers under the spot light are Lockhart, Evans, Bernanke, Kocherlakota, Plosser and Lacker. Within this list only Lockhart and Lacker are non-voters.

Given the focus on latest Fed comments Currency markets will be searching for anything that points towards a broader Fed stance towards a quicker hike to interest rates and/or reduction in the Fed’s balance sheet.

Regardless the Greenback may struggle to make much progress ahead of an expected European Central Bank (ECB) rate hike of 25 basis point on Thursday.

However as ever much will depend on the press statement. If the ECB simply reiterates market prospects of around 75bps of policy rate hikes this year the single European Currency will struggle to remain strong.

In addition it maybe likely that once the ECB meeting is out of the way the EUR may finally be vulnerable to pressure related to continuing peripheral tensions.

The results of the Irish bank stress tests last week, and political vacuum in Portugal ahead of elections set for June 5 were well absorbed by the EUR but it is debatable whether the division between increasing peripheral bond spreads and the EUR can carry on- evidence that finally the currency maybe regaining its mantle of funding currency.

It remains too early for the Bank of England to increase rates regardless of growing inflation readings and MPC members are expected to wait for the next months Inflation Report before a crucial shift in favour a rate rise.

At this point, members will have to tackle with the issue that economic data remains somewhat restrained as suggested in the weaker than expected March manufacturing PMI data.

Warren Buffett, the billionaire investor, has urged Americans at his annual general meeting to ignore the “prophets of doom”, and to believe that the country’s “best days lie ahead”.
In an upbeat annual letter to the shareholders of his investment firm, Mr Buffett said he was itching to make more large acquisitions.

The 26-page letter is seen as an authoritative guide to the state of the world’s biggest economy.

He is one of the world’s wealthiest and most influential investors. As such, his opinion is closely followed.

Despite the American economy struggling to emerge from the recession following the financial crisis, Mr Buffett believes the time is now right to make some major investments.

In his annual letter to his Berkshire Hathaway investors, he said his trigger finger was now itchy to invest in new projects, using some of the fund’s £23 billion dollars in cash reserves.

The news that Mr Buffett is seeking substantial new opportunities will be welcomed by many global investors.

Shares in the benchmark Dow Jones Index are roughly at the same levels as they were three years ago.

The UK economy shrank by more than previously thought during the last three months of 2010 revised official figures show.
Gross domestic product (GDP) slipped by 0.6% in the period, according to fresh data from the Office for National Statistics (ONS).

Its initial estimate had suggested the economy had contracted by 0.5% – with heavy snow blamed for the slump.

However the ONS said that the revision was not a dramatic one.

The ONS statement said that manufacturing appeared to have done quite well, but that the construction industry was weak. The services sector, which accounts for a large percentage of the economy, contracted.

GDP figures for a particular quarter are produced first as a so-called “flash” estimate, and are later revised at least twice as more detailed information is collated.

However Chief Secretary to the Treasury, Danny Alexander, said he expected the economy to recover.

“Of course, as we have said before these figures are disappointing. We have got to deal with the fact that we have inherited an enormous budget deficit – the previous government maxed out the nation’s credit card.

“But we have also got to do what we can to support the economic recovery. The early survey data suggests that the economy is able to bounce back and we are going to continue to do everything we can to support that.”

The Pound fell slightly after the figures to trade at $1.607, down 0.5 of a cent. Against the euro, the pound was unchanged at 1.17 euros.