It all started to feel very 2011 yesterday with a poor peripheral bond auction in Europe causing deep slashes lower in world equity and currency markets. In fact, so heavy was the fall on the FTSE that all the gains made since the turn of the year were wiped out; back to square one.
The country that represents the new bête noire for European policymakers is Spain and this bond auction was the first since the recent austerity bill. The government only managed to get EUR2.6bn of a prospective EUR3.5bn sold suggesting that rather than helping investor sentiment towards the country’s deficit reduction plan, the latest measures have heightened fears that further surprises may be somewhere down the road.
It will also be interesting to see how much of this issue was purchased by Spanish banks and how much was from international investors. If the demand from in country banks for its own sovereign’s debts has fallen this could signal that Spanish banks are in need of more funding and a further liquidity operation or LTRO may be needed.
The falls yesterday were exacerbated by the Federal Reserve’s vacillation towards further asset purchases in the US on Tuesday night while Mario Draghi once again emphasised that the ECB’s liquidity operations were of a temporary measure. In a brief opening statement following the ECB’s decision to hold rates at 1%, the governor emphasises the downside risks to growth in the Eurozone whilst saying that inflation was likely to remain elevated. He tried to assuage recent criticism from German quarters by saying that the bank would pay attention to rises in food and oil prices which helped stabilise the euro through his speech.
That being said, GBP-EUR did trade above the 1.21 level, albeit briefly, for the first time in 2 months yesterday following the Spanish bond auction, poor German factory orders and a strong UK service sector reading. UK PMI rose to 55.3 vs. an expectation of 53.4. We think we can finally put to bed fears that the UK economy fell into recession in the first quarter and, revisions excepted, it looks like the UK economy grew at a rate of about 0.3/0.4% in Q1. So much for the OECD’s fears.
Obviously, this is only just enough to cancel out Q4’s negativity and therefore does not change the fact that the UK economy is still “bumping along the bottom” and that expansive gains in output are unlikely in coming quarters.
Following the Fed minutes on Tuesday, more and more will focus on jobs figures going forward, looking for signs that the recovery is starting to creak. Yesterday’s ADP number came in at 209k, slightly above consensus, and the dollar gained as a result. Today’s initial jobless claims (13.30) and tomorrow’s Nonfarm payrolls (also 13.30) will be a key indicator as to how strong this recent dollar rally may be.
Here in the UK, we have the Bank of England’s April meeting and our thoughts, as the markets’ are, is that it will be a bit of a non-event. No change in QE or interest rates is expected although we could see some sterling strength following such a result as we expect some investors will be betting on a slight increase in asset purchases. They announce at 12.00.
We are closed tomorrow and Monday for the Easter break, so may we take this opportunity to wish you a happy Easter.
You can join us for a run-down of sterling’s prospects over the next month with Jeremy Cook as he deciphers the impact of Thursday’s morning’s Bank of England announcement.
The 1st quarter has shown the broad splits in the growth prospects for industrialised nations through the end of 2011 and into 2012. How different will Q2 be and what are the major risks to watch out for?
Indicative Rates Sell Buy
GBPEUR 1.2086 1.2113
GBPUSD 1.5880 1.5905
EURUSD 1.3123 1.3148
GBPJPY 130.58 130.86
GBPAUD 1.5427 1.5454
GBPNZD 1.9450 1.9478
GBPCAD 1.5825 1.5853
NZDUSD 0.8158 0.8177
GBPZAR 12.39 12.44
USDZAR 7.7968 7.8249
GBPPLN 5.0062 5.0330
EURJPY 107.90 108.17
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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