Chinese exports drop as UK recovery gathers momentum

We start this week after a very volatile week for the currency markets.
Chinese exports drop as UK recovery gathers momentum
The US Dollar lost most of it gains after ADP job forecasts came out much lower than expected as well as poor manufacturing numbers earlier in the week.

However, the non-farm payrolls number that was out on Friday, came at a reading of 175k which was much better than expected.

That helped the Dollar claw back some of its losses against most currencies, specifically commodity backed currencies, which have amidst the commodity selloff, lost heavily.

The USD/JPY pair has been the most volatile as it has moved along a 7 percent range in the week.

The Yen clawed its way back under the 100 mark earlier in the week after Prime Minister Abe’s speech that outlined strategies for investors painting a rosy picture, which managed to provide the Yen with some support, though not so for the free falling Japanese equity markets.

The non- farm payroll numbers from the US, though positive, were revised downwards by 12k which adjusted the unemployment rate by 0.1% which now stands at 7.6%.

This has kept the greenback weak and under pressure from most of it’s counterparts in opening trade.

With mixed figures coming out of the US, investors are now less inclined to continue with the sentiment of the Fed cutting back stimulus in the near future, as markets price in the over-reaction to Bernanke’s announcement that the Fed will ease its asset buying programme measures as soon as July.

Last week was also a very positive one for the Euro, on the contrary, as it surged to a 3 week high and the EUR/USD pair trades at 1.32 this morning.

The ECB met on their usual meeting on Thursday and kept rates on hold and revealed a promising outlook on growth forecasts for the region.

Despite weak manufacturing numbers earlier in the week, the ECB decided not to proceed with any plans of negative deposit rates. We had German industrial production figures out on Friday which also came in better than expected, in the wake of which Angela Merkel has urged the rest of the Euro zone to ‘follow Germany’s lead on growth’.

Meanwhile, European stock futures have fallen amidst China’s export figures that sank to a 10 month low in May as a crackdown on fake trade invoices exposed weakness in global demand.

Gold plummets

A disappointing day for risk assets yesterday threatens to advance further.
Gold plummetsWeaker than expected data from China and the US dragged on market sentiment supporting the theory that the worldwide economy is repeating the pattern of Q1 strength followed by weakness over the remainder of the year.

Growth fears aided to worsen the drop in gold prices with the valuable metal plummeting by 15.5% this month alone whilst weighing heavily on other commodity prices.

Data releases today include CPI inflation in the US, Eurozone and UK alongside the German ZEW investor confidence survey, US industrial production and housing starts.

The Eurogroup and Ecofin statement of an extension of Irish and Portuguese loans and the disclosure that Cyprus will need even more funds than previous estimates (EUR 23 billion compared to EUR 17.5 billion previously) has been taken in its stride by markets.

Given market sensitivity to weak data any discontent will strengthen the risk off tone but this appears doubtful as the data overall is expected to be somewhat healthier.

The Aussie was struck by weaker Chinese data releases and worsening in risk appetite.

While the drop has been sharp over recent days Australian Dollar is unlikely to fall much more, with an abundance and sufficient appetite for the currency around 1.0300. Nevertheless, AUD/USD has dropped below its 100 day moving average level 1.0414 – a breach of which threatens to mark a stronger downward move.

Finally, UK Inflation is expected to rise another 2.8% in March and persistent price growth may increase the demand for Sterling as it diminishes the Bank of England’s (BoE) space to expand on QE.

As the central bank expects a slow but sustainable recovery in Britain, above-target inflation should keep the MPC on the side-lines, and we may see a growing number of BoE officials adopt a more neutral to hawkish tone for monetary policy as the Funding for Lending Scheme continues to work its way through the real economy.

Risk appetite is back on the menu

Risk sentiment remains buoyant following the aggressive easing by the Bank of Japan (BOJ) which the market is now pricing in as a move into risk.Risk appetite is back on the menuAsian markets and equities continue to rally and we are also seeing a follow through into gains in commodity currencies and US Dollar weakness.

The GBP/USD exchange rate has managed to squeeze higher still on this momentum and EUR/USD is also looking healthier.

Yesterday we had the FOMC minutes which through a slip up were actually leaked earlier than expected.

The minutes suggest a slightly more hawkish tone than what is being followed through by the FED in policy actions, however the markets shrugged off this tone believing the FED will continue to stick to its asset purchases at a rate of $85 billion per month through to year end.

On Friday we have US retail sales which is expected to show that consumer spending is softening in response to higher taxes and lower disposable income- if so this would support the FED keeping their foot on the QE pedal.

Yesterday Chinese data was also supportive for a move into risk as China announced mild trade deficit which to some extent dispels concerns of a weak domestic demand.

In addition outlook in China was supported by a tempering in inflation confirmed in the inflation report easing pressure for monetary tightening.

In the currency markets all eyes are watching US Dollar/JP Yen which is testing the key level of 100.

So far it has failed to breach it and remains a key psychological barrier which if exceeded would demonstrate the effectiveness of the BOJ policy in relation to depreciating the Yen.

Elsewhere we do not have any major data releases and the markets will continue to look to maintain the move into risk.

Wise money markets take a breather

On Friday we saw a move back into risk aversion catalysed by weak Chinese data which strongly contrasted the previous Friday where the markets rallied significantly. Wise money markets take a breatherThis move back into risk off mode led to a weakening of the euro and gains in the US Dollar, in addition we also saw the Australian Dollar weaken off somewhat from its impressive gains.

As we open this week there is little change from Friday’s close and the momentum for the week ahead will be focused on overall risk sentiment and again the attention primarily will be on Europe.

Angela Merkel is back from her holidays and we will await any comments from her on Italy and Spain and the role of the ECB.

We also have euro zone growth figures this week to help shape overall sentiment but aside from this data we have little pickings in economic data to look out for.

The U.S week ahead will see the release of consumer price data to add some spice to the QE3 debate.

Also in focus this week are data points on the health of U.S retailers, Industrial production, Philadelphia Fed manufacturing Index, and consumer confidence data from the University of Michigan.

Chinese GDP growth eases investors fears

Chinese data out overnight showed that the world’s second largest economy GDP growth at 7.6% a year- however Chinese industrial production came in at 9.5% below the 9.8% expectation. Chinese GDP growth eases investors fearsEven though it shows the sixth consecutive quarter of decline in China, the GDP figure has helped to reassure markets.

However with many analysts expecting the figure to come in below expectation, risk assets including the major Asian and European markets are in the green this morning.

The data may open the door to more stimulus measures out of China with premier Wen Jiabao not ruling the prospect out, but also that the recent interest rate cuts could be having a positive effect.

In Europe overnight, ratings agency Moody’s has cut Italy’s credit rating by 2 notches, down to Baa2, which is just two notches above a so called ‘Junk Status’ where Greece is currently sitting.

This has already pushed Italian 10 year bond yields up by 14 basis points to 6.06% with Spanish yields also up at 6.72%.

This is a contrasting picture to Ireland getting a clean bill of health from the ‘Troika’ of lenders who have been impressed with the reforms in the country.

It has been reported this week that overnight deposits have fallen at ECB since the ratings cut to 0 by the bank last week.

This is seen as widely positive by ECB president Mario Draghi as a sign that could see banks start to lend to each other rather then parking funds at the institution.

Slowing global growth has continued to push investors to seek safe haven currencies with EUR/USD hitting a two year low yesterday breaching 1.22 in a sign that confidence in the Euro is still being undermined by the ongoing crisis that is continuing to drag down the global economy.

GBP/USD has also taken a beating this week with it only just keeping its head above the water at 1.54, caused by the large swings in EUR/USD and the continuing weak economy.

Chinese interest rate cut rocks the money markets

China’s central bank yesterday surprised the money markets by cutting interest rates for the first time since 2008, sending out a signal that their economic slowdown is starting to bite. Chinese interest rate cut rocks the money marketsChina’s economic growth slowed to 8.1% in the first quarter, down from 9.2% in 2011.

Cutting the interest rate demonstrates that China are proactively looking to protect their economic growth with perceived headwinds for global growth ahead.

The rate cut led to a rally in equities as investors tentatively pulled out of safe havens, this in turn led to a selloff in the US Dollar which has been heavily bought into as a safe shore of late and a boost in commodity based currencies and the AUS Dollar in particular.

The move by China echoes rate cuts from around the globe with Australia and Brazil also cutting interest rates recently; in addition there is also more expectation for central bank action by the US Federal Reserve and the Bank of England to respond to a deteriorating Europe.

Ben Bernanke the US Federal reserve Chairman however dashed hopes of more stimuli at the June 20th meeting by calling on congress to address fiscal concerns and share the burden.

Recent weak US jobs data and concerns in Europe had raised hopes of a further injection by the Fed but this was tempered by Mr Bernanke, however he did assert that the Fed remain ready to act if required.

The Bank of England yesterday held interest rates and QE as expected in spite of some talk of further easing.

It will be interesting to see the minutes in relation to how close the decision was and if we can expect to see further easing in the near future.

Nothing too significant in terms of economic data today as we close the week and the markets will be looking to try to maintain yesterday’s upbeat mood.

Chinese inflation rates fall

China’s inflation rate has drop to 3.4% in April from 3.6% in the previous month and below the Chinese government target of 4%.Chinese inflation rates fallThis will reduce the headache for the government as rising consumer costs have been one of the biggest causes for concern in recent times reaching as high as 6.5% in July last year.

The drop in the oil price has certainly helped China’s progress alongside its bid to improve domestic demand to offset their fall in global demand for their exports.

Recent data suggests that Chinese consumption is struggling as imports grew only 0.3% last month compared to 5.3% in March.

Consequently investors will be keen to see how policy makers act within the next few months, perhaps leading to a cut in interest rates.

Back in Blighty, the NIESR National Institute for Social Economic Research (NIESR)’s reserach indicates that UK GDP grew by 0.1% over the quarter to April following the 0.2% drop in the previous 3 months.

Details of the report revealed that the negative output is expected to widen further as a result of the sluggish economy.

They expect the UK economy to remain broadly flat over the next 6 months according to the report.

These latest figures support the Bank of England’s case to maintain low interest rates in an attempt to boost growth.

As expected both the interest rate decision and the QE programme where left unchanged yesterday.

Europe suffers China bailout snub

The sentiment in the money markets shifted again over the weekend as China commented on the Eurozone’s planned bailout package. Europe suffers China bailout snubChina, which has taken even more focus lately as European leaders look towards the Eastern powerhouse to invest billions more into Europe to prop up the ailing economies and banks, have yet to confirm their position.

The most recent comments stated that China will co-operate and said “a prosperous and stable Europe is important to China’s stability and development”, but it will not be the “saviour” 0f indebted nations- handing over “dumb money”.

This is likely to keep French President Nicolas Sarkozy up at night as he has been on the phone to his Chinese counterpart saying Beijing has a “major role to play” in Europe’s recovery.

The euro loss some of the ground it made towards the end of last week as traders looked at the potential of this new bailout package failing apart.

Europe needs China to add at least €60bn on top of what they already have put in to make this new step in securing Europe’s future viable.

Without it, there aren’t enough willing sovereign states or wealthy individual investors to progress and the top brass across Europe will have to look for yet another new way of saving the single currency.

The return of risk

What a day! Risk was forcibly thrown on the table as markets interpreted was most  had seen as just bare bones of a European rescue plan as reason to be cheerful,  and risk assets surged throughout the European session and overnight.  The return of riskLeading the way was the Euro, up two cents against the Dollar and Sterling and looking increasingly like it will continue to march higher.

Not far behind the way on were the banks, which contrary to every other industry that receives a recapitalisation managed to convince the market that getting €106bn to shore up creaky balance sheets it is a good, rather than negative development.

Also helping sentiment was the American GDP figure although only inline with estimates, reassured investors that the world’s largest economy is still growing, albeit at a sluggish pace.

Reports today suggest that euro leaders will go cap in hand to China asking them to be a significant investor in the European Bail-out fund.

This move which was widely expected given the size of China’s foreign exchange reserves and their perceived desire to diversify away some of the vast amount of Dollars they are holding.

The interesting thing will be finding out the political cost of the money – silence on the currency manipulator tag- or human rights perhaps?

Whatever the economic and political motivations behind the news will lend strength to the Euro as we move into the weekend.

Wise money markets in quiet period

The wise money markets have been fairly quiet over the past twenty four hours.Wise money markets in quiet periodSterling has been slightly hurt by comments from Chancellor Osborne who said that fiscal strategy is giving the central bank freedom to keep interest rates lower for a longer period of time.

The publication of the Bank of England’s Quarterly Inflation Report headlines the economic calendar today.

However the market will be looking to Governor King’s interpretation of the report at this morning’s press conference. It will be looking to see if he continues to be more dovish than the projections in the report which would see weakness in GBP.

In the eurozone, the situation in Greece remains in focus this morning and has done over the last 24 hours.

Conflicting messages emerged yesterday from both Greece and Germany. Ultimately it seems no new agreement has been reached on a new bailout package for the country and so the debate will continue.

For now healthy risk appetite, evidence of which we have seen in the positive performance of global equities over the last 24 hours, is acting to support the Euro.  German CPI data has already been released this morning and came in as expected at 0.2%.

Mixed results from a slew of economic releases from China this morning- inflation held above 5% in April and lending exceeded analysts’ estimates, signalling that further monetary tightening may be needed to cool the fastest-growing major economy.

Consumer prices rose 5.3% from a year earlier and banks extended £71 billion (74 billion Yang) of local-currency loans.

The headline CPI reading has outpaced the government’s 4% target every month so far this year and Vice Premier Wang Qishan said inflation was the “most pressing problem” facing his country earlier this week.