WISE MONEY

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.

Reports today suggest FX analysts are the most pessimistic on the Pound since May 2009, predicting the Chancellor’s cuts will eat into economic growth, the already soft economic recovery is forecast to slow causing Sterling to fall back against both the Dollar and Euro. Median estimates suggest the Pound will drop 8 per cent against the Euro by year end as the recent bullish UK data starts to deteriorate.

The US Dollar rose sharply on Friday against the Euro, Sterling, Aussie and Canadian dollar on the back of risk aversion, while safe haven currencies such as CHF and JPY strengthened against the dollar.

The Fed is perceived by the markets to be in a holding pattern until further directional economic data is released. Weakness in global equities carried through to European markets sending major indices lower while US stocks are lower as the sell off continued.

The Euro fell against a basket of currencies on Friday and remains on the defensive this morning as comments by a senior ECB official fuelled expectations for liquidity to remain a concern for the single currency.

ECB Governing Council member Axel Weber told Bloomberg in an interview published on Friday it would be “wise” to extend unlimited liquidity to banks past the end of 2010. The Euro was further hit after the US Federal Reserve said the US and global economic recovery was losing steam, striking a nerve with investors.

The euro zone is seeing an increasing split not only in banking but in the economy in general. While the euro zone economy improved in the second quarter with Germany setting the tone, southern Europe recorded much more muted growth.

Market analysts believe the ECB may have little option but to keep flooding the money market with cash to help banks and governments in the EU.

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.

The Liberal Democrats are holding the country to ransom while an unelected leader of the Labour Party remains Prime Minister.

It is a measure of Gordon Brown’s loose grip on reality that he sought to depict his decision to stand down later this year as a noble act of self-sacrifice made in the national interest. The truth is that this was an act of quite staggering cynicism based on naked party advantage.

With the incomprehensible connivance of Nick Clegg – whose reputation will surely never recover – Mr Brown is effectively seeking to nullify the result of last week’s general election. Blinded by his tribal loathing of the Conservatives, he is ready to risk everything – and the Daily Telegraph used that term advisedly – to keep David Cameron out of Downing Street.

This unelected leader of the Labour Party will remain Prime Minister, even though his party secured two million fewer votes and 48 fewer seats than the Tories.

He will then hand over at a time of his choosing to a new Labour leader. At that point, the United Kingdom will find itself governed by a Labour prime minister the country has not elected, succeeding a Labour prime minister neither the country nor his party elected. Even by Labour’s standards, this is self-serving and unscrupulous.

Mr Brown talked yesterday about the importance of a strong and stable government at a time of grave economic crisis. Yet he is seeking to concoct with the Liberal Democrats a governing coalition that will be inherently unstable and weak. A Lib-Lab pact cannot deliver a majority in the new House of Commons.

It will be reliant on the smaller parties – the Scottish and Welsh Nationalists, perhaps the DUP – to secure its business. What will that mean? That the English taxpayer will be expected to keep those parts of the UK in the heavily-subsidised style to which they have become accustomed.

This at a time of economic distress when deep cuts in the public services in England are inevitable. Just as pertinent, England voted decisively for the Tories last Thursday (297 seats to Labour’s 191), yet is to be effectively disenfranchised by the Brown/Clegg stitch-up.

Does Mr Brown realise how dangerous a game he is playing? He has made much over the past couple of years of his devotion to the Union, yet his political scheming will place it under immense strain.

And how exactly is a Labour leadership contest supposed to encourage stability? Campaigns were already gearing up last night. The notion that the challengers to succeed Mr Brown will be devoting their full energy to their ministerial jobs in the weeks and months ahead is, frankly, laughable.

The markets responded to Mr Brown’s pieties about stable government by plummeting. They assessed very quickly just how ramshackle such a cobbled-together coalition will be.

The prospect of swift and decisive action to tackle the deficit evaporated at precisely one minute to five yesterday, when Mr Brown made his surprise statement in Downing Street.

Why is this happening at all? This brings us to Mr Clegg and the Liberal Democrats. They are, in effect, holding the country to ransom in pursuit of a new voting system. An issue that featured nowhere on the list of voter priorities in the general election now dominates the political debate.

And the tail is wagging the dog. Last Thursday, the two parties that were formally opposed to PR, the Tories and Labour, between them polled 19 million votes. The party that supports PR polled fewer than seven million votes. Is this what Mr Clegg means when he talks about the “new politics”? And what is “new” about a deal brokered by three unelected Labour figures – Lying lords Mandelson and Adonis and Alastair Campbell?

Since last Friday we have lived with the fiction that Mr Brown was simply doing his constitutional duty by staying at the helm until a new government could be formed, acting in the national interest.

Now we see that all the time he has been acting in his and his party’s interest, defying the verdict of the electorate by trying to create a coalition of the election losers. This is a bleak day for our democracy.

The Greeks completed their Bond issue sale yesterday and sold €1.6billion in one of their most important debt auctions.

The combination of six and twelve month loans surpassed expected demand by €360 million. The attractive rates offered at nearly 4.9% gained much interest from short term traders and caused a short rally on the Euro against Sterling and the Dollar.

However, as the afternoon progressed, the markets returned to an unconvinced attitude as concerns crept in on Greece’s overall long term debt issue.

Back to UK and we had a brief Sterling rally yesterday as the ONS stated that Britain’s goods trade gap dropped to £6.179bn in February, an unexpected improvement of close to £1bn. Exports leapt by 9.5% in the same period, the largest rise since Jan 2003.

Also, reports of house price rises outnumbered reports of house price declines according to the Royal Institution of Chartered Surveyors.

However, it must be noted the Pound has still given up almost all its gains during the past 24 trading hours with the election’s ubiquitous presence over the currency.

A largely political budget failed to rattle the financial markets and the Pound was unmoved on the back of the budget- although it did slip against the US Dollar due to other factors.

It was announced that there would be a reduction in the government borrowing requirements but it was not enough to shift sterling especially as no clarity was divulged on how exactly the deficit would be reduced. Sterling did slip against the US Dollar following jittery trading on the downgrade of Portugal and the ongoing back and forth with Greece and the EU which led to USD buying.

This morning the Pound has staged a recovery following much better than expected retail sales data from the UK at +2.1% month on month; currently we sit at 1.4950 on the USD and 1.12 against the euro.

The euro was the big mover in the currency markets yesterday- on the downside.

There is hope of an agreement for Greece in the next couple of days from the EU summit but until this is definitive the euro will be under pressure.

Interestingly the PBOC (Public Bank Of China) have commented that the Greece debt crisis is just the beginning for the Euro zone- not good news for the euro and this could encourage longer term holders of the single currency to start dumping it and thus forcing it lower still.

Not a great deal of movement in the money markets- the Pound is currently just under the 1.50 level and a touch over 1.11 against the euro.

The Pound has lost about a cent against the US Dollar in early trading as the markets remain nervous on the budget outcome. In addition the pound is a little softer in relation to UK inflation falling (although very slightly) for the first time since September- the fall will be welcomed by the BoE who predicted lower inflation for the second half of 2010.

However the rate which now sits at +3.0% year on year is still a full 1 per cent above the target level of 2%, the pound is lower as falling inflation could lead to further Quantitative Easing in the future.

The euro also remains flat and is just below the key 1.35 level against the USD with any upward potential tempered by the Greece fallout. The Greek PM stated that he will not be going to the EU summit as a beggar and also that he expects a positive outcome from the summit.

The Greek deputy PM then threw in his spanner by stating that if financial aid was not forthcoming from the EU, then it questions the concept of the Eurozone as a whole.

The Swiss Franc is still gathering strength in the markets especially against the euro- hitting all time highs in the low 1.43’s.

Swiss National Bank chairman Hildebrand has been discussing the Swiss economy and the strength of the Franc. He has stated that the SNB has means to fight the excessive Franc rise and that it can buy very large quantities of foreign currency. Therefore this is one to watch for intervention in the near future to weaken the Franc.

The Pound has so far held onto yesterdays gains following the unexpected fall in the unemployment claimant count.

The market welcomed the data along with the unanimous decision from the Bank of England to hold on QE. If you look at the employment numbers more closely the headline figure shrouds weak underlying trends in the labour market- however this was ignored for now by the markets and the news provided a rare opportunity to buy the pound.

Already today we have seen the dreaded Public sector net borrowing data come and go without any nasty surprises- the data was actually better than expected with PSNB at 12.361 bln against the forecasted rise to 14.75 bln for February.

In other data mortgage approvals for the UK sunk to 48k identifying further sluggish lending in the housing sector. The pound seems nicely consolidated above 1.52 and 1.11, however it is unlikely to see further big moves now until next weeks budget.

In other news the Canadian dollar is still on its drive to parity against the US Dollar and is currently within one cent of achieving this. The Canadian government are playing down the strength of the Canadian Dollar for now but there must be a real concern for Canadian companies who rely on exporting.

Although the Bank of Canada have repeatedly expressed concern in the past on the strength of the CAD the recent improvement in economic sentiment is unlikely to lead to any firm action or comments on the currency for now.

Following over two weeks of selling pressure the financial markets seems to be running out of new reasons to sell the Pound.

We have already heard lots about a hung parliament, the deficit, weak growth prospects, QE and negative M&A flows.

The Pound has undoubtedly struggled but it seems to have found a bottom for now at the key 1.50 rate against the US Dollar and 1.10 on the euro.

Recent news that hit the pound was that the European Commission is concerned about the UK’s bulging deficit and the UK needs to dramatically enforce it’s fiscal programme.

This did lead the pound lower but it has bounced back and this to me signals that we may have limited downside potential unless we see anything new to attack sterling. The key level against the USD is for a move back over 1.52.

On Friday the Pound managed to move over 1.52 against the US Dollar following news that an opinion poll indicated an outright Conservative majority- if Sterling could vote it would vote conservative!

However the weekend polls have again pointed towards a hung parliament helping to soften the pound.  In addition we had UK Right move house price data which did not paint a good picture for the housing market.

Also the ratings agency Moody’s affirmed that the UK’s fiscal position has been subject to “extreme deterioration”, which was negative for the pound.  However they did affirm that the UK is still a long way from anything that would prompt a ratings outlook change.

They also commented that the post election budget will be of much greater importance than the March 24th budget. Although the pound remains for now over 1.50 against the USD, the fact that it could not sustain a move over 1.52 maintains the bearish trend.

For the week ahead we have various feedback from central banks with minutes from the BoE, FOMC and the Reserve Bank of Australia.  In addition for the UK we have the recently famed Public Sector Net borrowing, mortgage approvals, jobless claims and unemployment.

It is difficult to foresee any positives in the upcoming data for Sterling, hopefully the data will be a case of damage limitation.