10.03.2010...The daily report below is from Moneycorp
Every little hurts
- Three-year high for UK trade deficit - More warnings about UK' credit rating
Good morning. Industrial action is in the headlines again, even though it is all taking place in the services sector and involves everything bar action. As one dispute is solved another springs up. Royal Mail has cemented a fabulous deal that gives postpeople more money for fewer hours. The result will be vast amounts of junk mail on the doormat every evening. Whoopee. British Airways has until lunchtime to head off a cabin crew strike and Network rail faces a walkout by maintenance people that could prevent passengers getting to airports in time to find their flights cancelled. The public sector strike is a missed opportunity for the unions involved. Had they simply called out the folk who look after roadside speed cameras they would, at a stroke, have generated a wave of public support and hit the government where it hurts.
We will have confirmation this morning of just how much it is hurting when Gordon Brown reads out a speech he has already circulated to the media. Apparently the economy is at a crossroads, there are substantial risks ahead and the stakes are high. Nevertheless, the prime minister refuses to turn back. He will hold his course and complete his mission, pausing only briefly on 24 March for the chancellor to deliver his pre-election budget. It will be stirring stuff and should be good for at least a three cent rally for sterling.
And goodness knows, sterling needs a fillip at the moment. Although it was generally steady yesterday there was no correction to the gratuitous losses it incurred on Monday. That was not a great surprise, given the drip feed of negative news that appeared during the day. First up was Britain's trade deficit. The £8 billion shortfall in January was the widest since August 2008. In that month sterling's trade-weighted index averaged 104.41; in January this year it averaged 80.63. Despite a 23% weaker - thus, in theory, more competitive - exchange rate exports were down and imports were up. Investors are entitled to ask just how low the currency must go before the gap narrows.
There was also more angst about credit ratings and the financial system. Not for the first time, credit ratings agency Fitch expressed concern about the lack of action to balance the budget. It said it was 'uncomfortable with the fiscal adjustment path set out by UK authorities' and looked for 'more credible and stronger fiscal consolidation plans during 2010.' Grouping Britain with Spain and France Fitch said 'failure to do so will intensify pressure on their sovereign ratings.' There was concern from two directions about the financial system. Moody's worried that the banking system would be left in a 'fragile' position by the end of the Bank of England's Special Liquidity Scheme. Credit Suisse suggested UK banks, collectively, would have to reduce their footings by more than £500 billion over the next three or four years in order to meet new liquidity regulations.
Unusually, the most upbeat tone came from the Bank of England. MPC member Adam Posen told Sky News that 'we believe growth will pick up from here'. He believes the quantitative easing already delivered by the Bank will have been enough. He dismissed any idea that sterling's wounds were fatal, saying that 'there’s always a danger of reading too much into short-term currency moves.' And he was optimistic about the high level of government debt, saying 'all three major parties have made it clear they are going to pass some kind of austerity budget. The details do matter, but they’re all going to be big enough to get us on the right track.' Phew.
In light of the above it is instructive to see sterling opening in London this morning all but unchanged from its position 24 hours ago. The euro, too, has its debt and credit issues. The EU's snap assessment of the tax increases announced in Greece yesterday is that they are not enough. Nor does the EU believe the proposed European Monetary Fund, even if it existed, could correct Greece's 'urgent issues'. And the euro had another banana skin thrown in its path this morning with some less than helpful German data. The country's trade surplus in January was barely half the size of the previous month and half the size analysts had predicted. Depressingly, that 'unhelpful' trade surplus amounted to €8.7 billion. At current exchange rates it is awfully similar to the €8.8 billion deficit achieved by Britain in the same month.
There are no more pan-Euroland data on the agenda but Italian and French industrial production figures are due out this morning. Shortly afterwards the equivalent UK figures will be released. If they are not considerably better than the previous month's results the pound will find itself under renewed pressure. For a second day there are no meaningful figures from Canada or the States. Tonight the Reserve Bank of New Zealand's monetary policy statement is expected to stick to the existing line, with higher interest rates pencilled in for mid-year.
So will investors focus on the warnings about credit ratings and financial instability or will they warm to the words of the egregious optimist, Adam Posen? We should know by ten o'clock.
09.03.2010...The weekly report below is from Moneycorp
MONEYCORP: WEEKLY UPDATE The EUR - Euro weekly update
In this week's update: LUCKY ESCAPE FOR STERLING Positive economic signs from the UK economy allow a near-miraculous recovery for sterling after a sharp fall. Investors are more relaxed about the Greek budget problems.
Sterling fell sharply last Monday, losing nearly two cents before lunch. The remainder of the week was devoted to the slow and tedious process of recovery. Although it seemed an impossible ambition last Monday afternoon sterling opened in London this morning at €1.11, unchanged on the week.
At the beginning of the week the non-domiciled tax status of Baron Ashcroft dominated the media. Allegedly, the noble lord had bought his way into a peerage by making large donations to the Conservative party. For some reason this old tradition had become suddenly improper. It would be an exaggeration to blame sterling's sharp fall on Lord Ashcroft alone but the story will certainly have unnerved investors who were already nervous about the Tories failing to win a majority at the forthcoming general election.
From there it was uphill all the way but at least sterling managed to make it up the hill with the assistance of some positive news. On Tuesday the government held a successful auction of 30-year gilts which attracted bids for nearly twice that much. The last five auctions of 30-year stock have achieved an average of 1.63 times cover so, whatever misgivings they may have about sterling's short-term future, there is a degree of confidence among investors the current problems will be short-lived.
Having ignored Monday's manufacturing purchasing managers' index (their minds were on other things) investors took a great deal of interest in Wednesday's services sector PMI. At 58.4 the services PMI was more than three points better than predicted, scoring a three-year high. It blew America's 53.0 and Euroland's 51.8 into the weeds. Coming hard on the heels of a ten-point jump in consumer confidence it was another reminder to the market that not everything to do with Britain's economy is in a state of collapse. There was more reassurance from the Bank of England when the Monetary Policy Committee voted to keep interest rates unchanged for a 13th month and to leave quantitative easing on hold.
A rash of data provided no coherent picture of the euro zone economy. The manufacturing and services PMIs were both a little softer on the month but not far adrift from what the analysts had forecast. Consumer and producer price inflation were roughly in line with the market's expectations but had no immediate implications for euro interest rates. A -0.3% monthly fall for retail sales was better than the expected -0.5% decline but still not exactly positive. The revision to fourth quarter GDP showed the Euroland economy growing by +0.1%.
The European Central Bank tightened monetary policy on Thursday with an end to the cheap three-month loans it had been offering to commercial banks. They will still be able to borrow one-week money at 1% but the three-month rate will depend in future on market rates. The ECB had nothing to offer the Athens government and said it would oppose any attempt to approach the IMF for assistance. Nevertheless, Greece did manage to find buyers for a €5 billion bond issue.
By the end of the weekend it had become clear that, although Germany would not put its hand in its pocket for a Greek bailout, the EU had an emergency plan if push came to shove. At least for the moment investors are comfortable, if not deliriously happy, about the situation but their next question will be whether France and Germany will be able to carry the euro zone economy ahead on their own if the economies of Greece, Spain, Portugal, Ireland and Italy are to be weighed down by austerity measures of one sort or another.
Whilst sterling's recovery last week might be seen as a sign that there is life in the old dog yet, it is still hard to see the British currency as anything other than a dog. Opinion polls continue to indicate a hung parliament and investors fear that even after the general election Britain's government will be paralysed by indecision, unable or unwilling to tackle the budget gap. Buyers of the euro should hedge 50% of what they will need. If the money is required in the near future they should consider covering the whole amount.
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