We finally got a European leader’s summit yesterday that met expectations. Unfortunately the expectations for the meeting were so low that to have to failed to meet them would have involved someone setting the building on fire. Any decisions on Greece or the recapitalisation of the Spanish banking system have been put off until after the Greek elections on June 17th and so this was merely an opportunity to agree on what they already disagree upon.
Yesterday’s slash lower in the euro and world equity markets was as the result of it finally becoming clear that the European authorities had asked member state treasuries to lay out their plans to deal with a Greek exit from the single currency. Investors are obviously worried that this could occur and the fact that governments are war-gaming scenarios when a couple of months ago they could not countenance a Greek exit only heighten those concerns. Personally, I’m glad that they are thinking about it; “Be Prepared” as the scouts would say.
There will be a distinct lack of support for European assets while the political uncertainty remains with Greece hanging like an albatross around the neck of the euro.
The price action in sterling was also as expected, especially following the poor retail sales number released yesterday morning. If ever a retail sales figure suggested that an economy needed further stimulus then this was one; April’s was the lowest since January 2010. We had forecast that the number would be poor following the weather and a drop in purchases following the fuel crisis that wasn’t but a slash of 2.3% was nowhere near consensus views. The inflation picture won’t have helped either although yesterday’s figures suggested that retailers are starting to lower prices as demand slips.
The Bank of England minutes were as expected with only one member of the committee (David Miles) voting for further QE (£25bn) following Adam Posen’s very public vacillations. I think we may see the Bank agree to further QE at their June meeting and pump around £50bn into the market over the course of the following 3 months. The amount does depend on the prospects for Greece however, a disorderly exit could see a much greater amount of easing. The minutes seemed to show that the vote was finely balanced for a fair few members of the committee.
Unfortunately for mortgage payers, I think an interest rate cut is not going to happen. The marginal benefit of a 25bps cut would be very little as consumers still remain reticent to spend and spare cash would be likely to be used for savings or the paying down of debt, none of which stimulates the economy.
Stimulating the economy and growth is all the politicians can talk about at the moment and you can expect more and more with the 1st revision to the UK’s Q1 GDP number due at 09.30. Unfortunately the recent data suggests that a downward revision is more likely than an upward one as a result of further poor construction numbers released since the initial estimate. German GDP has already been reconfirmed at 0.5% for Q1.
The Chinese story refuses to go away following another poor manufacturing release. The PMI for the manufacturing sector has slipped for the 7th month in a row although reaction in risk such as AUD has been muted. We receive German manufacturing and services data at 08.30.
Indicative Rates Sell Buy
GBPEUR 1.2409 1.2436
GBPUSD 1.5730 1.5754
EURUSD 1.2652 1.2685
GBPJPY 125.14 125.42
GBPAUD 1.6100 1.6126
GBPNZD 2.0935 2.0965
GBPCAD 1.6069 1.6098
NZDUSD 0.7504 0.7523
GBPZAR 13.13 13.18
USDZAR 8.3526 8.3823
GBPPLN 5.4051 5.4345
EURJPY 100.69 100.96
Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered. Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.
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