Europe was never going to remain out of the limelight for long and it came barging back in yesterday with all the speed and tolerance of a bull (or bear) in a china shop. It became very clear yesterday that it was going to be a day of negativity across risky assets, fuelled by the same fears that have been market headlines for the past two years now.
Following the 5th consecutive month of contraction in the Chinese manufacturing sector, we saw an unexpected slip in both German and the European-wide manufacturing PMI which suggested that January’s positive number was merely a blip and a multi-quarter recession in the Eurozone is more than likely.
The fears in the past that we would have a “two-speed” Europe; Germany streaking ahead as a result of its high-quality export base and the rest of the continent left in its wake. It now looks like we may have a 1.5-speed Europe with Germany dragged back into the mire.
The fact that the data was Europe-wide and not as a result of peripheral nation weakness saw bond yields come back into focus. Spanish yields have been creeping higher as the market has become more and more wary that the combination of very high unemployment and further fiscal austerity means that deficit reduction plans will become more and more difficult to fulfil. The fears over Italy have slipped away as a result of the Monti government’s technocratic government and the reforms enacted in the past few months to loosen the strangle of unions on the work-force. It seems though that Spain is the country the market is betting on to get into trouble sooner rather than later.
It wasn’t just Europe that had its share of bad news through the session however. Sterling had rallied nicely versus the euro following the publication of those manufacturing numbers but this was swiftly cut down as our prediction of a poor retail sales number came true. We were always going to have a fall following last month’s bumper 1.2% rise but a dip of 0.8% has caused people to sit and wonder whether the economic revival at the beginning of 2012 is already coming to an end.
We think not, but this doesn’t change the fact that the consumer is facing a barrage of higher taxes, high inflation and increased fears over unemployment. It is our belief that a lot of the rise last month was as a result of price discounting and this month’s dip was as a result of the festive price cutting ending and shoppers counting the pennies a little more carefully.
The fact that it follows a budget that was short on growth targeting measures will not go amiss.
The improvement of the US jobs market continued yesterday with the latest initial jobless claims number falling to 348k.
Overnight we have seen the pound take another hit following news that consumer confidence slipped in February, wiping out a good portion of the gains seen in January. The reasons are obvious: high food prices, fears about the jobs market and concern about the cutting of government services.
Friday’s session will feature Italian retail sales from January at 09.00, which are expected to remain negative following a 1.1% slip in December. US home sales close the week off at 14.00
Indicative Rates Sell Buy
GBPEUR 1.1948 1.1975
GBPUSD 1.5865 1.5891
EURUSD 1.3263 1.3286
GBPJPY 131.01 131.30
GBPAUD 1.5197 1.5224
GBPNZD 1.9443 1.9470
GBPCAD 1.5838 1.5867
NZDUSD 0.8148 0.8170
GBPZAR 12.16 12.21
USDZAR 7.6606 7.6912
GBPPLN 4.9561 4.9840
EURJPY 109.56 109.82
Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered by Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time.
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