WISE MONEY

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.

Back in July, 91 of Europe’s largest banks were required to disclose how much government liability from European countries they held on their balance sheets. Euro regulators said the data showed banks’ total holdings of that debt as of March 31st. At the time, worries about the Banks’ government-debt holdings were fanning fears about the health of Europe’s banking system as a whole.

Release of the bank data was considered the main benefit of the stress tests, which were widely criticized as being lenient overall, but taken as showing that the exposures were not as widespread and extreme as had been feared.

According to an article in today’s Wall Street Journal, “An examination of the banks’ disclosures indicates that some banks didn’t provide as comprehensive a picture of their government-debt holdings as regulators claimed.

Some banks excluded certain bonds, and many reduced the sums to account for “short” positions they held—facts that neither regulators nor most banks disclosed when the test results were published in late July”.

Asian markets, starved of news or data input following the US/Canadian Bank Holiday, seized upon this article and dumped the Euro – especially versus the Yen – on fears that eurozone governments and institutions would accordingly find it difficult to raise new and renew maturing funding with doubts returning over the health of the region’s finance.

The Yen was the favoured recipient on the lack of mention of the strength of the currency in the statement from the Bank of Japan which followed their decision to leave Japanese rates and QE levels on hold.

The Central Bank now seems more confident of strong domestic growth, and the expectation is that lower unemployment and increasing inflationary pressures will prompt the Bank to resume a hike in official rates later this year.

Also this morning, Australia’s Labour Prime Minister, Julia Gillard, finally secured the support of two key Independent MPs which enable her to form a working Government with a majority of 2 over the opposition party.

Ironically, today is Labour Day in the US and in Canada which means very little work will be done anywhere.
Going back to Friday, the stripped out version of the non-farm payrolls figure produced much stronger employment numbers than had been anticipated.

The market now feels that removing the seasonally volatile short-term Government hirings gives a much more relevant picture of the employment situation.

Accordingly, August private payrolls were reported to have grown by 67,000 (against the consensus figure of 40,000) whilst the July number was revised up from the previously reported -131,000 to -54,000.

Economists quickly concluded that, although the US economy continues to face problems ahead, and that the unemployment rate will likely remain stubbornly high, Friday’s employment report is an important step in the right direction, and should weaken the case for additional quantitative easing on the part of Federal Reserve.

Today’s subdued market is likely to set the tone for certainly the early part of the week with only a light amount of data scheduled and no policy changes anticipated at any of the 3 Central Bank meetings over the coming days.

Following the additional easing measures decided upon at the emergency meeting on 30th August, the market expects the Bank of Japan to maintain its policy settings tomorrow morning.

Market focus will continue to be on the seemingly inexorable appreciation of the Yen and what the government is going to do to try and suppress it.

The Reserve Bank of Australia is also expected to maintain the status quo on rates given the unexpectedly low CPI figure for the 2nd Qtr of the year.

The Bank of Japan (BOJ) has announced emergency measures to boost lending aimed at combating the rising value of the yen.
Following an emergency meeting, the central bank said it would increasing lending to commercial banks by 10 trillion yen ($117bn; £75bn).

The measure is designed to stem the value of the currency, and boost lending to businesses.

Meanwhile the Japanese government has announced its own plans for a 920 billion yen stimulus package.

Prime minister Naoto Kan said ministers had agreed a plan to fight the rise in the yen, as well as to try and counter weakness in some economies – especially the US and in Europe – that buy Japanese goods.

Analysts fear the rising yen is undermining the country’s fragile economic recovery.

When making their plans for the year, many companies had been betting on the yen staying at about 90 to the dollar. So when it hit a 15-year high of 83 yen, it bit deeply into their profits.

A strong yen makes exports less competitive overseas. It also reduces the value of profits made abroad when they are repatriated to Japan.

In a statement, the BOJ said its decision to boost its low interest bank loan programme meant 30 trillion yen was now available for lending.

“The bank believes that the monetary-easing measure, together with government efforts, will be effective in further ensuring Japan’s economic recovery,” it said.

The BOJ hopes that increasing the amount of loans available will reduce market interest rates, curbing rises in the yen.

Last week the currency hit a 15-month high against the dollar – potentially a significant problem for the Japanese economy which relies heavily on exports for growth.

The euro weakened for a second day against the US Dollar, the Japanese Yen and the British Pound as signs the European debt crisis is spreading revived concern the region’s recovery will slow.In particular, the 16 nation currency fell to within one yen of its weakest point in more than eight years after the IMF urged Spain to do more to overhaul its ailing banks.

Markets are concerned about what policy makers can do to contain the debt crisis should it spread from Greece to bigger nations like Spain and Italy. The IMF welcomed the new Spanish austerity measures, referring to plans to rein in its budget deficit with the deepest cuts in three decades but expressed concern over its banking industry and the slow reaction in consolidating ailing lenders with stronger partners.

The EUR/USD is now back trading close to the May 19th four year low.

Despite recent acceptable data from the Eurozone countries themselves, there is a real fear that the recovery will sputter to a halt amidst the internal wrangling of how to deal with the spiraling funding crisis.

This will obviously have a knock on effect towards the global recovery, with the UK especially exposed to a weaker European market.

Sterling has accordingly been shorted aggressively, but largely against just the Dollar and the Yen. It has managed to gain slightly against the Euro on the back of QoQ GDP coming in as expected at 0.3%.

The US was decidedly quiet yesterday although we are still experiencing US$ LIBOR ticking higher on a daily basis adding further fuel to the Dollar strength argument.

The market appears to be waiting for anything tangible on exchange rates emerging from Geithner’s meeting with Chinese officials.

Yesterday they appeared to skirt the issue and spent most of their session together discussing Europe and the implications to both countries of the current situation. Today’s final session could be more interesting.

After stabilising on Friday, the Euro took another pounding this morning as details begin to emerge about the proposed €45 billion rescue package.

Greece’s request for emergency aid looked to stem the flow of selling as Finance minister Papaconstantinou warned investors they will “lose their shirts” if they bet the cash strapped nation will default. The debt saddled country has announced billions of euros in austerity measures, including tax hikes and public sector wage cuts.

The Euro has been trading back above 1.16 against Sterling while Euro/dollar has fallen below 1.33.

Friday’s UK data proved negative for the Pound as we discovered the economy grew at half the pace economists predicted in the first three months of the year. The office for National Statistics reported that GDP grew by 0.2% in Q1 2010 against the 0.4% analysts had expected.

The focus in the UK will be on the final weeks of the election campaign and the possible outcomes that may emerge as polling day draws closer. Leader of the Lib Dems, Nick Clegg, has warned current PM Gordon Brown not to expect a coalition with his party, though a tie up with the Conservatives also looks unlikely.

The Dollar advanced to a two week high against the Yen as government reports showed US new home sales rose in March by the most in almost five decades and orders for durable goods surged. Bookings for US durable goods excluding transportation items advanced 2.8 percent last month after a 1.7 percent gain in February.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.