High Street Proves a Tough Habitat

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Sentiment in the retail sector took a dive following the news that Thornton’s will close 180 shops nationwide and Habitat announced it was going into administration. Retail sales figures of late had suggested it was getting tougher on the high street as consumers are feeling the squeeze of low wage growth and high inflation.

On Monday, the third estimate for Q1 GDP threw up few surprises when it was confirmed once more that the UK economy grew by 0.5%. There was a slight upward revision in construction output which was cancelled out by a downward revision to manufacturing.

It is the manufacturing sector that will be drawing most attention from analysts following the purchasing manager’s index data released on Friday. In June, the figure fell to 51.3 down from 52 in May. This shows that the sector is still expanding and that jobs are being created. However, the pace of growth is more subdued and given that manufacturing has been our shining light, guiding the UK out of the recession, this could be a sign of tougher times to come. With the austerity measures being put into action it is likely that domestic demand will suffer. This means our exposure to the global economic shocks, such as the tsunami in Japan or the crisis in Europe, is even greater.

There was little else for analysts to get their teeth into. Mortgage approvals were down on expectations as the housing market continues to drag its heels through every data release.

The BoE’s credit conditions survey for Q2 reported that “In the three months to early June, lenders reported that the availability of credit to households and corporates was broadly unchanged.”

Key releases for Sterling this week

PMI Construction – out this morning at 53.6 as expected.

PMI Services is out on Tuesday at 9.30am – we anticipate a poor reading following poor consumer confidence figures which will be bearish for Sterling.

Industrial production and Manufacturing production are both out on Thursday at 9.30am – both down slightly on expectation as global demand slows. This will be bearish for Sterling.

Bank of England Interest rate decision is out on Thursday at Midday – we anticipate no change on rates or quantitative easing and little impact on Sterling.

Producer price index is out on Friday at 9.30am – we anticipate a slight fall in PPI in line with a drop in commodity prices which will be bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week is a ‘Participating Forward Plus’. This differs from the usual participating forward in that, for an increased risk, your strike improves from 1.08 to 1.09 against a forward rate of 1.10. The client decided to hedge his next 6 months of exposure via this trade.

The client will benefit in 50% of any upward movement i.e. should GBPEUR be 1.23 on expiry, 14 cents better than the strike rate, the client receives 1.16, 7.00 cents better than the strike rate. Should the GBPEUR rate be below 1.0900 and above 1.0400 on expiry they are able to buy euros at 1.0900, if it is below 1.0400 however, then for every percentage point below 1.0400 they lose the same off their strike of 1.09

This strategy is premium free and allows a hedge with a nominal WCR of only 2.5 cents from current market price while a normal participating forward would see a WCR at least 1.00 further cent lower. The trade also works without the additional risk but your worst case rate decreases to 1.08 from 1.09.

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High Street Proves a Tough Habitat

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