Meet the new year, same as the old year

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So this is the new year and markets look to be starting 2012 with a renewed sense of vigour. I don’t blame anyone if they didn’t pay much attention to the economic news over the festive break as there wasn’t much. What was about mainly focused on politicians talking about how 2011 was a tough year and that we shouldn’t expect 2012 to be any different. Merkel, Cameron and Sarkozy were all fairly downcast in their end of year appraisals but the political mood is not influencing risk so far.

Equities were open in Europe yesterday and the DAX led the way as it moved higher by 3%. Most of this we expect to be as a result of traders buying their “Trades of 2012” but a broad rally in risky assets through the opening sessions of the year is entirely possible if yesterday’s moves are amplified through other markets.

Europe will remain the main focus of the markets through Q1 and Q2, save some black swan event happening elsewhere, and the panacea that everyone has been hoping for has yet to appear. Italian and other peripheral yields have remained elevated through the end of the year and Spain’s will not have been helped by a warning from the new government that the country’s budget deficit may continue to rise past the 8% level. This would put it as the third largest deficit in the Eurozone after Greece and Ireland but 8% is still a better figure than either the US or UK can claim. The difference is, both us and the Americans can print our currency and attempt to inflate the problem; Spain is tied to everyone else in the Eurozone.

While a near term rally in risk may be on the cards, the fundamentals of the Eurozone still remain very poor. The situation was made evident by the poor manufacturing data from Europe yesterday. The manufacturing PMI survey for the area was 46.9 for the month of December; the fifth consecutive month of it being below 50.0 and therefore, the fifth consecutive month of contraction. This is not expected to turn around and forms the basis of the expected recession that should fall across the Eurozone from last quarter onwards. Similar data is due from the UK today and while a contraction is expected, the depth is set to be less severe than the European measure. We do however expect that Q4’s GDP number will show almost now growth (GDP expectation is 0.1% QOQ).

Rates are roughly where we left them pre-Christmas and, save a large sell-off in EURUSD on Dec 30th, there has not been much volatility to speak of. We doubt that will last however and urge people to look at GBPEUR near the 1.20 with a hedging eye.

Apart from UK manufacturing (09.30) we have German unemployment (08.55) which is expected to show a further decrease in December, although how much of this is seasonal will be a key number. The US manufacturing ISM is due at 3pm.

Indicative Rates Sell Buy
GBPEUR 1.1976 1.2002
GBPUSD 1.5556 1.5579
EURUSD 1.2975 1.2998
GBPJPY 119.38 119.66
GBPAUD 1.5106 1.5131
GBPNZD 1.9819 1.9847
GBPCAD 1.5760 1.5789
NZDUSD 0.7840 0.7860
GBPZAR 12.52 12.57
USDZAR 8.0399 8.0758
GBPPLN 5.3207 5.3550
EURJPY 99.60 99.87

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