WISE MONEY

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.

Speculation over the announcement of another round of quantitative easing (QE2) at tonight’s Federal Reserve meeting is reverberating around the money markets at present.The consensus seems to be that that additional liquidity will be added to the system through reinvestment of maturing assets already on the Fed balance sheet, rather than return to fully blown quantitative easing.

The recent surge in commodity prices after Russia placed a halt on exports of grain is a worrying development for the Fed, it will need to consider that further down the road after it may find certain parts of the economy experiencing inflation at the same time as others are suffering from rampant deflation.

This is why this Fed meeting is seen as so important– we wait to here which way the inflation/ deflation needle is pushed (unless we end up waiting until next month!).

Sterling continued its climb against the Dollar yesterday as momentum from Fridays disappointing US jobs figures continued in early trading.

But the Dollar has regained some ground this morning after the announcement from the Royal Institute of Chartered Surveyors that UK house prices have declined for the first time in a year.

On Friday, the Dow Jones fell by as much as 120 points after annualised growth in gross domestic product (GDP) was found to have slowed from 3.7% in the first quarter to 2.4% in the second.That came on the back of growth of 5% in the final three months of 2009. The US was initially thought to have grown by 2.7% in the first quarter but that was revised upwards on a day of surprises for economists.

The US Commerce Department also revised downwards GDP figures all the way back to the beginning of 2007.

The second-quarter slowdown led economists to question whether the US might be poised to enter a period of negative growth later in the year, leading to a much-feared double-dip recession.

The Dow Jones fell sharply after the release of the GDP data before recovering ground to settle down 40.72 at 10,426.44 in lunchtime trading. Economists had predicted second-quarter growth of 2.5pc, but their disappointment was compounded by the revised data for the first three months of 2010.

The biggest concern in the City was the size of the downward revisions to previous years’ growth. In 2009 the economy was previously estimated to have declined by 2.4%, but the figure was revised to a drop of 2.6%.

The disappointing growth numbers were compounded by the International Monetary Fund’s (IMF) annual report on the US economy. The IMF said there may be a need for the Obama administration to increase the amount of fiscal stimulus in order to boost the recovery, warning the “outlook remains uncertain”.

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Last night Ben Bernanke, Chairman of the Federal Reserve, delivered his twice yearly report to Congress where he outlined their outlook on the US economy.
Due to the oblique nature of Central Bank parlance, Mr Bernanke’s speech was closely watched for any indication, however vague, that the Fed thinks the economic recovery in the US is not proceeding the pace originally thought.

He duly obliged, saying that the outlook was “unusually uncertain” and stressing again that persistently high unemployment remains a real problem and is likely to remain so for an extended period.

The dovish tone and increasingly cautious outlook naturally led to a reduction in risk appetite and the corresponding sell off in US equities and rise in the Dollar.

Cable had a volatile days trading yesterday, just before 8am we saw a huge Sterling sell, dropping from 1.5290 to 1.5168 in a minute before recovering after reports of a fat finger or algorithmic trading problem at a bank in the Netherlands.

Whatever happened, we are sure someone is seeking alternative employment this morning.

The euro hit a two month high against the US Dollar before running into large selling resistance and falling back towards 1.25. Although German manufacturers posted some impressive sales figures at the end of last week and boosted confidence in the continuing Eurozone economic recovery, fears over manufacturing and unemployment data in periphery member nations is swamping any and all positive news from Germany.

Added to the muted response to the Stress test methodology there is enough news around the keep the Euro suppressed for the next few days.

Sterling fell below the key 1.50 level over the weekend as fears over the UK economic recovery remerged. The IMF’s warning that spending cuts and tax increases announced by the coalition Government will reduce future growth levels has pushed the pound lower against the Dollar and Euro, but the key driver of the Sterling sell off seems to be technical.

Failure to break through the 1.5260 level signalled to traders to realise profits, sending the Pound lower.

We will get a clearer picture of the current economic climate in the UK this week, with the release of the delayed GDP figures and inflation and unemployment data.

Money markets around the world fell this morning as investors worried about the lack of global growth resurfaced in Asia.
London’s FTSE benchmark index of top companies was down 1.08pc at 4,911.56 points in early trading, Frankfurt’s DAX 30 slid 0.6pc and Paris’ CAC 40 sank 1pc.

Sterling slipped to $1.51 as the fall in shares took the steam out of the Pound’s corrective rally against the dollar.

Data showing a slide in UK job growth in June helped the Pound lower as it highlighted the fragility of the employment sector, which is likely to face more pressure when drastic public spending cuts take effect.

The UK Recruitment and Employment Confederation said its permanent placements index fell to a five-month low of 60.7 in June from 61.3 in May.

Asian markets retreated as investors lost their appetite for stocks after a disappointing US services sector report pointed to an anemic recovery in the world’s largest economy.

Despite a short-lived rebound in global markets on Tuesday as bargain-hunters piled in, traders remained unable to shake deepening unease about the global economy.

Japan’s Nikkei 225 fell 0.6pc as a strong yen kept pressure on exporter shares. A strong yen reduces the value of their overseas profits and makes Japanese products more expensive abroad.

Elsewhere, Hong Kong’s Hang Seng index lost 1.1pc and Seoul’s Kospi was down 0.5pc. China’s Shanghai Composite edged higher.

Financial bets against the Pound Sterling have fallen significantly since the emergency Budget – with hedge funds and speculators closing their positions that expected falls in the value of sterling.
In the seven days following the emergency Budget, the number of short positions in sterling fell from 62,267 to 52,397, according to data compiled by the US Commodity Futures Trading Commission.

The number of long positions increased slightly over the same period from 15,921 to 17,626.

The data is based on the activity on the Chicago Mercantile Exchange, which, despite accounting for a fraction of the daily turnover on the world’s currency markets, is seen as representing the wider market.

Short selling of the Pound hit record levels following the formation of the coalition Government with the number of sell contracts reaching 76,745 amid fears that political uncertainty would hamper attempts to tackle the deficit.

But sterling has risen sharply against the dollar over the past month. The pound is up 8 cents or 5.7pc against the dollar since hitting a low of $1.43 on June 8. Yesterday it closed up 0.75 cents at $1.517.

Wise Money urges a note of caution- whilst Sterling’s outlook has improved in the past month, the balance of speculators still hold a net short position by a factor of three to one.

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Recent US data has managed to hold back the US Dollar suggesting that cyclical factors and not just risk aversion are beginning to play into foreign exchange markets.
This can be seen with Sterling breaking through the key 1.50 level and even the flagging Euro is reaching nearly 1.24 against the greenback at the time of writing.

The Pound has found further support with talk in the market that a UK clearer needs to buy cable today for dividend payment purposes.

The effect is not likely to be excessively large, however it may well be helping underpin the pairing in recent trade.

Sunday saw the biggest non event after a certain football match with the G20 summit which like England, the communiqué failed to get a grip on challenges that face them.

Maybe a little harsh as they agreed new targets for reducing deficits and sovereign debt, however questions regarding tougher capital and liquidity requirements for banks were delayed until November’s summit in Seoul, providing leaders with time to work out their individual differences.

US non farm payrolls are one of the most important data releases in the money markets since jobs- preferably good ones, are the lifeblood of any economy.Today sees the June release of the figures, with an estimated 508,000 jobs added in May, by far the largest estimate ever. Adding over 500,000 jobs to the economy would hearten even the biggest bears and, you would think, be strongly positive for the Dollar.

But there is much more to this number than meets the eye. Firstly, the ranges of forecasts are the broadest ever, with the lowest coming in at 100,000 jobs added and the highest at 750,000.

Given the past records of the economists making the forecasts (the average ‘miss’ is 70,000 jobs) we could be looking at the largest forecast error on record as well. The problem then becomes deciding what will happen to Dollar after the release.

A huge ‘miss’ of 200,000 means the US would still have added over 300,000 jobs in May but the Dollar may still fall on the back of it. If the forecasts are correct and we see a gain of over 500,000 (as said before the largest ever). If the market has priced this in we may see no move at all.

The conclusion? What seems like extremely bullish data at first glance may be the largest but also the strangest and most confused NFP data ever.

The Euro is retesting lows seen two weeks ago as data from the ECB showed Eurozone banks depositing record amounts of cash in the ECBs overnight facility.

Increasing worries over loan losses and sovereign default means banks would rather keep funds at the Central Bank than lend it out in the inter-bank money markets. Alongside the jittery banks, European consumers continue to hang on to their cash instead of spending, with retail sales figures again disappointing.

After the money markets closed on Friday, Spain’s debt rating was downgraded by the ratings agency Fitch from AAA to AA plus with outlook stable.

The move seemed to have been priced into the market with very little movement in the price of the Euro over the extended weekend, but as the European trading session got underway on Tuesday, the Euro has come under renewed pressured and is now trading below 1.22.

On EUR/USD and over 1.18 against Sterling. The Spanish PM is facing mounting pressure to push through long awaited labour reform laws, with unemployment running at over 20% and huge amounts of pressure being applied by Spanish labour unions, we are entering a critical phase for Spain.

The recent ECB stability report has forecast further write-downs for European banks.

Sovereign debt contagion will spark a second wave of loan losses of greater magnitude than the £200 billion already written off up to December 2009 according to the report.

The ECB has also continued in its purchase of government debt, Portuguese, Spanish and Greek bonds have all been soaked up in the continuing effort to alleviate some of the fiscal strains affecting them.

David Laws, newly appointed Chief Secretary to the Treasury, resigned over the weekend over fresh MP expenses irregularities. Mr Laws has been replaced by Danny Alexander, a key member of Mr. Clegg’s negotiating team.

The news has caused concern in the markets because of the timing of the announcement and the nature of Mr Laws role in implementing the Governments policy of reducing the Budget deficit, temporarily at least putting downward pressure on Sterling.

The Reserve Bank of Australia kept interest rates on hold, a decision widely expected and already priced into the market. But the Aussie is coming under further pressure since the big move a couple of weeks back.

As continuing fears over the 40% super levy on mining companies gather momentum, it is still unclear if the large miners, widely expected to gain at least some concession in the deal, will get anything at and will have to bite the bullet and pay up.

Data revealing China’s housing market continues to overheat has also increased the downside pressure on the Aussie, since China is the main buyer of the raw materials that Australia produces.