Articles from October 2012

Spanish GDP provides some joy to Rajoy

Official figures yesterday suggested the Spanish economy shrank during the last quarter- though at a slightly slower pace of negative growth.Spanish GDP provides some joy to RajoyThe on-going issues of a growing budget deficit and property crisis have left their banks exposed to a huge pile of bad loans.

In turn, huge austerity measures in the form of spending cuts and tax rises have stifled investment and have left consumers without the money or the will to spend.

The numbers did not make pretty reading showing the economy contracted 0.3% QoQ, however this was slightly better than the expectation of 0.4% figures widely tipped by commentators.

So this number was arguably the most important release outside of the US employment data later this week as it provides a clue as to whether the Spanish PM Mariano Rajoy will seek a full blown sovereign bail out.

This number will certainly provide him with a little more breathing space for sure, however one feels that this is delaying the inevitable.

Spain will now turn to the ECB and specifically Mario Draghi to discuss a possible bond-buying programme to help ease the country’s debt problems.

The numbers have certainly boosted the euro despite slightly weaker than expected German unemployment figures with the Euro trading close to 1.30 against the US Dollar at 1.2997 at the time of writing.

Over to the US and the markets are expected to re-open this afternoon and it will be an interesting watch to see how the Greenback performs.

Despite Hurricane Sandy and what appears to close election the US Dollar has actually weakened despite uncertainty on both stories.

As ever we will be closely looking into the ADP jobs number on Thursday for guidance as to how the Non-Farm Payroll numbers will be on Friday.

All indications are pointing towards a positive number of 125,000 new jobs, following the stronger than expected GDP last week alongside better than expected Personal Consumption data on Tuesday.

Sterling has recovered from it’s early week flirt with 1.60 and is now up to 1.6112 with a quiet day of UK data ahead.

Sandy storm keeps uncertainty going

Hurricane Sandy continues to lash the east coast of America causing severe flooding and damages and leading to the decision to close the New York Stock Exchange for two consecutive days. Sandy storm keeps uncertainty goingThe full implications of the damage will be more evident at daybreak and the economic cost is poised to reach $20 billion.

The wise money markets have switched to a risk off mode as uncertainty prevails on the repercussions of Sandy and also with the US election swiftly approaching.

The US Dollar has gained across the FX markets in line with the risk off sentiment and this trend is widely expected to continue for the remainder of the week.

In other news the Bank of Japan has kept its overnight call rate unchanged, however it has expanded its asset purchase programme by Japanese Yen (JPY) 11 trillion; the asset purchase programme now totals JPY91 trillion.

The JPY has actually strengthened against the US Dollar on the news and against most of its major counterparts.

Demand for the Yen has increased with hurricane Sandy and the expansion of the programme has not led to a weaker Yen.

The BOJ would need to be much more aggressive to weaken the Yen and add some relief to the manufacturing sector.

Elsewhere Spain’s Q3 GDP came in marginally ahead of expectations at -0.3%.

Yesterday Spain’s PM Rajoy in a press conference ruled out an imminent request for a bailout which put pressure on the euro.

This morning’s slightly better GDP number will support his view that Spain does not yet require formal aid.

The Pound also slipped yesterday as the Bank of England deputy governor warned that Q4 could be weak after the upbeat Q3 data.

Momentum is now needed for the UK’s drive to recovery and future UK data snaps will come under the spotlight for signs of an on-going recovery.

Hurricane Sandy weighs in on wise money market sentiment

US markets will be closed on Monday and possibly Tuesday as Hurricane Sandy looks to make landfall.Hurricane Sandy weighs in on wise money market sentimentHowever the US Dollar has strengthened in Asian trade as investors look to flee riskier assets, likely until they are able to survey the damage of the storm and the toll it will take on America’s recovery.

The wise money markets will this week be looking towards Friday’s Non-Farm Payroll’s, ISM Manufacturing Index and US jobless claims.

Another volatile end to a volatile week last week with GB Pound v euro swaying two cents throughout the week from lows in the 1.22’s and finishing in the 1.24’s.

GBP/USD finished just above 1.61 after touching the low 1.59’s midweek and EUR/USD finishing below 1.30 after a disappointing week for the Euro.

To start the week we have had more negative news weighing on euro sentiment with Spanish retail sales figures posting a worse than expected figure of -10.9% from consensus -6.2% and the, so called, Greek Troika  has announced no more concessions will be made over Greek labour reforms.

Better then expected UK GDP figures ignited hunger for Sterling against euro and US Dollar.

Today Sterling is rather quiet with nothing of note coming out but markets will be eagerly watching the release of Thursday’s Manufacturing PMI and Nationwide House Price Index to see if the elation of last weeks good GDP figure has transferred into the economy.

Other data our this week we have Bank of Japan interest rate decision tomorrow  with ECB Mario Draghi also hosting his monthly press conference and Spanish GDP.

On Wednesday we have German Retail figures and Thursday Chinese PMI manufacturing and UK Nationwide HPI and Manufacturing PMI.

Sterling lifted by GDP data

Finally some good GDP news from the UK economy!Sterling lifted by GDP dataAs Wise Money posted yesterday- the ONS reported in its preliminary estimate that the UK economy grew by one percent in the third quarter, boosted mainly by the Olympics and Paralympics.

The consensus estimates were for around 0.6% so the number lifted Sterling across the board and the Pound is clinging onto its gains in early trading this morning.

The data may mean the Bank of England will pass on further easing, which was widely expected before this GDP number was announced, when they meet early next week.

Which should also boost Sterling and the money markets.

Delving into the numbers further, however, reveals the ONS estimates of London 2012 tickets sales (which were only accounted for this quarter despite being sold in tranches over the past year or so) adding 0.2 per percentages points to the total number.

So a large, one off item is giving the GDP number its shine.

Some of the move higher by the Pound was triggered by Prime Minister David Cameron during Wednesday’s PMQ’s after he inadvertently suggested there was “good news” on the way.

Given that he was one of the few minsters privy to the ONS data ahead of the embargo, the revelation is a school boy error on Mr Cameron’s part and has led to A Rap On The Knuckles by the head of the ONS, who wrote to the PM and suggesting a reform of the current process.

Looking forward to next week we have the Bank of England and ECB rate decisions on Thursday, the US non-farm payrolls and it also marks the last full week before the US election.

UK GDP economy rises to 5 year high

UK third quarter provisional GDP has surprised even the optimists with a +1% number.UK GDP economy rises to 5 year highIt is therefore  unsurprising that David Cameron could not contain himself by hinting on the expected good news yesterday.

The median forecast was for +0.6% and thus the number is well above expectations.

The Pound is rallying on the news and is up and continuing to push higher against the euro and the US Dollar.

The UK GDP figures will be a welcome relief for the government as the UK economy emerges from a double dip recession with the strongest quarter on quarter growth for five years.

Yesterday Mervyn King suggested that the bank stood ready for more stimulus if necessary but also warned that the limits of the effectiveness of monetary easing was being reached.

The Pound could now be in line for further gains with the sentiment of the UK economy turning more optimistic and putting the worst behind it coupled with less chance of further central bank stimulus.

Over to the US and the FOMC offered no substantial changes to policy and thus we did not see any significant movements in the markets.

The next FOMC meeting on Dec 12 will be of more note and we are likely to learn more on a decision for operation twist to be extended or completed.

At the next meeting we could also see more treasury bond buying and this may be in combination with QE3 MBS buying at the current pace of $40 billion per month or more.

Before this decision the Fed will gauge economic indicators and in particular the health of the labour market and of course digest the election outcome.

Spanish credit crisis resurfaces

The wise money markets have dropped more than 1 percent globally in overnight trading as concerns over Spain and the euro economy increase.Spanish credit crisis resurfacesThis has led to the euro to fall back against the dollar to the lowest in the last 2 weeks ever since it broke the 1.30 barrier closing overnight at 1.2950.

Once again the troubled Spanish economy continued to be the major focal point as investor fears loom over the recession in the region.

Ever since Moody’s downgraded the 5 regions including Catalunya, the 10 yr yields rose 13bps to 5.62 percent.

GDP figures from the region also came in poorly as it showed the economy shrank by 0.4% in the third quarter reinstating fears that the recession will inevitably last until the end of 2012.

However, the bond auction saw Spain sell €3.53 billion worth of short term 3 yr debt.

Investors had priced in the fact that a Spanish bailout request was inevitable, but the reluctance to ask for further aid by Spain has sent the markets into fear resulting in the euro facing weakness.

From the US markets, poor corporate earnings provided the catalyst for a general move away from riskier assets.

This brought about early weakness in the dollar however it did manage to gain some strength on the back of poor news from Spain.

Corporate earnings in the UK continued to frustrate investors as UK Stocks tumbled the most in almost a month.

We expect third quarter GDP figures from the UK tomorrow and the bleak outlook is driving most investors towards the Greenback.

This has prompted a slump in Sterling to close yesterday below the psychological 1.60 level.

Bank of England governor Mervyn King, in a speech in Cardiff insisted that he is ready to inject further stimulus if the recovery falters. Investors continue to take direction from broader equity markets which have plagued risk sentiment for the time being.

Credit rating Moody’s downgrades Spanish regions

Moody’s the credit rating agency has cut the debt ratings of five Spanish regions, following the decision to keep its rating on Spain at one level above junk last week.Credit rating Moody's downgrades Spanish regionsThe areas included: Andalucia, Extremadura, Castilla-La Mancha, Catalunya and Murcia who have seen their ratings dropped by one or two notches thanks to “very limited cash reserves… and their significant reliance on short-term credit lines to fund their operating needs”, according to Moody’s.

Eurozone debt rose to another record high according to official figures from Brussels’ yesterday.  Overall the sizes of deficits were reduced but countries were still adding billions of euros to their debt piles.

The level moved to 87.3 per cent of GDP within the Eurozone, up from 85.4 per cent in 2010, and 70.2 per cent back in 2008.

The extent of Eurozone states’ shortfalls reduced somewhat to a combined level of 4.1 per cent of GDP, from 6.2 per cent in 2010 – however this still meant an extra €390.7 billion government debt.

Elsewhere the broader European Union area, only six countries saw their level of debt as a percentage of GDP fall from 2010 to 2011, while 21 saw it worsen.

In spite of Chancellor George Osborne promising a reduction in government spending, the UK’s shortfall continued to be one of the largest in Europe.

Only Ireland, Greece and Spain logged a greater annual deficit that the UK .

Compare this with the  powerhouse economy Germany, which dropped its budget deficit less than 1% of GDP in 2011 from 4.1 per cent in 2010 and its debt fell to 80.5 per cent of GDP from 82.5 per cent.

Finally, EU members Sweden, Hungary and Estonia succeeded to stop the trend and record budget surpluses in 2011, even with the on-going economic decline across most of the euro region.

This morning, Sterling temporarily dropped below the key psychological level of 1.60 dropping to 1.5996.

The Pound’s movements will be interesting to watch on the run up to the much anticipated GDP figure which comes out on Thursday which should prove the UK is officially out of recession.

The figure will be flattered by the automatic rebound from the lost working day due to the Queen’s Diamond Jubilee in June and the addition of Olympic ticket sales.

The ONS has estimated that the extra bank holiday wiped 0.5pc off growth in the second quarter and the ticket sales will add 0.2pc to growth in the third quarter.

Wise money markets stall on Wall Street

As the wise money markets continued to digest the EU Summit- it appears it to have failed again, to ignite investor confidence with hunger for risk in US trade on Friday reversing Thursday’s gains.Wise money markets stall on Wall StreetDisappointing Existing Home Sales and corporate earnings in America helped to strengthen the US Dollar as investors sought a safe haven away from riskier assets including the euro.

The euro traded sideways against Sterling and US Dollar on Friday after the initial Summit announcement of a succession of central bank powers to Brussels failed to keep investor sentiment and led to a run on EUR/USD and also reversing gains on EUR/GBP.

Without further political statements, further delays in Troika sign off for the privatisation of Greek services, and next tranche payment, may keep Euro demand weak until German and French PMI and German IFO Business Climate Index on Wednesday.

A better than expected Retail figure on Thursday helped to prop up Sterling against the a week of a strengthening euro after further speculation that more QE could be on the way from Bank of England next month.

Other news there has been continued talk of the central Bank of Japan using more stimulus measures to boost the economy as exports slow, 10% down, and it announced that it has downgraded economic outlook for 8/9 regions in Japan for the next quarter.

EU agrees banking union

Late last night EU leaders finally agreed to a banking union between member states, adopting a legal framework by the end of 2012 giving the ECB overall control of the supervision of EU banks.EU agrees banking unionThe rapid pace of reform is being cheered in the markets this morning by a rise in the value of the euro, but the key question of whether the EU rescue fund will be able to inject cash directly into stricken banks was left unanswered after pressure from the Germans.

Overall the move is a very positive one for the euro and is likely to continue the momentum the single currency has built up over the last week as periphery bond yields continue to fall.

Italy also managed to get away almost €18 billion in bonds yesterday, something that 6 months ago would have been impossible.

The ECB can be pleased with its OMT announcement so far.

Around the markets today German PPI data was marginally higher than expected, 1.7% against the consensus forecast of 1.6%, and we look towards UK public sector net borrowing data and Canadian CPI date this afternoon.

The UK government has announced that several large pension schemes have signed up to the pensions infrastructure platform, a policy aimed at kick starting the economy by using money from pension funds in under-invested road and rail projects.

The size of the funds is expected to reach £2 billion and is expected to launch in early 2013.

EU summit centre of attention

As the EU summit gets under way all eyes will be on how European leaders respond to the challenges facing Europe.EU summit centre of attentionThe aim of the summit will be to focus a drive for a more unified political and economic block as opposed to fire-fighting from one crisis to the next.

As we stand the market is awaiting news on a sovereign bailout request from Spain or at least a credit line to be put in place to ease on-going credit concerns.

With this expectation and positive talk from EU politicians ahead of the EU summit the euro is gaining.

EUR/USD has once again pushed back over 1.30 and is trading at the moment at 1.3125.

However as we stand Spain is still reluctant to request a bailout and the decision rests with them, it is a catch 22 as the recent fall in Spain’s cost of borrowing actually eases the pressure for a formal request.

From the UK we have also had September Retail Sales which came in better than expected.

So the mood is upbeat so far today as we wait to see if Europe can follow through with the good momentum.

With hope on positive news to come from the EU summit and better economic indicators from China the markets are experiencing a move back into risk.

Asian equities are higher after Chinese GDP increased in Q3 and we also saw good economic activity indicators.

In addition to support the move into risk we had upbeat US housing data and confirmation the Moody’s the credit ratings agency decision to maintain Spain’s sovereign investment credit rating.