Risk remains bid despite IMF funding chatter

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Someone said to me months and months ago that they weren’t too worried about the financial crisis as “It’s not like the IMF is running out of money or anything like that”. I suspect my friend is now out there buying soup and a high-powered rifle after the news yesterday that the IMF will be aksing the nations that contribute to it for an additional $500bn of funding.

This is an obvious plea to the BRIC nations (Brazil, Russia, India and China) for funding in an attempt to boost the Fund’s firepower for dealing with the Eurozone; the fund cannot rely on previous contributors either it seems. In the US, Congress decide on whether further funds beyond a certain point can be given to the IMF. With unemployment high and spending being cut in an election year you would think that lawmakers will stay well away from any appropriations to a fund that will see no money paid into US coffers. Similarly here in the UK it will have to go through parliament and, debate and argument over this are almost assured. Unfortunately this is another case of the politicians getting involved and the result probably ending up as less than ideal.

Despite this news, risk has been well bought overnight with EURUSD hitting a 2 week high through the Asian session. Equities in the US and the Far East were bid after a good earnings report from Goldman Sachs and investors continuing to bet on the belief that the Greek PSI talks will end soon in a positive light. There are bulls and bears on both side of this argument and the outcome is a typical binary one; if it goes well, risk will rally. If it doesn’t, it will collapse and nobody is totally sure which way it will go.

One thing that is not going well is the unemployment picture here in the UK. Unemployment rose to the highest rate in 16 years yesterday with the ILO rate now coming in at 8.4% compared to 8.1% through August. The government has explained this as a result of the cuts but also the negative impact of the Eurozone crisis. Its critics have said that this is a harbinger that the UK economy has slipped into recession.

Indeed some members at the top of government may have already started to soften the ground for a negative GDP number in Q4. George Osborne, who is currently on a tour of the Far East, said yesterday that a negative number was “possible”. Now he could mean that it is “possible” in that is “possible” that I might marry Pippa Middleton i.e. in the realms of possibility but unlikely or, more likely, he is softening the ground for a weakfish figure (-0.1% to 0.1%). We were one of the most bearish forecasters in November with our call for growth of 0.1%; it now seems we will be near the top end of things. UK GDP is released next Tuesday.

Today the focus is on Spain however and, in particular, their bond markets. We have had a lot of short-term money auctions from the Eurozone of late but Spain today will attempt to get rid of 10 year debt. Longer term debt is a better indicator of economic strength, or the lack thereof, so today’s sale will be a good barometer of the market’s beliefs for Spain over the long term.

Indicative Rates Sell Buy
GBPEUR 1.1987 1.2015
GBPUSD 1.5421 1.5448
EURUSD 1.2848 1.2872
GBPJPY 118.33 118.62
GBPAUD 1.4843 1.4870
GBPNZD 1.9232 1.9262
GBPCAD 1.5579 1.5609
NZDUSD 0.8008 0.8029
GBPZAR 12.29 12.34
USDZAR 7.9552 7.9891
GBPPLN 5.2129 5.2293
EURJPY 98.62 98.88

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