The week that was
As we move towards the close of the week there have been a few notable themes that are worth considering for the developments of the markets into March.
One undeniable theme has been the significant underperformance of GBP. On a trade weighted basis GBP has declined around 2% from Monday’s highs, with most of the move coming in the last couple of days. From a data perspective the situation has been at worst mixed: we have seen more evidence of the decline in mortgage lending / borrowing in January (though our anecdotal evidence suggests that this picked up in February following some relief from the adverse weather conditions of January); The BoE testimony to the Treasury Select Committee whilst reiterating the possibility of a resumption in QE further down the line, Mervyn King explicitly stated that they stand ready to expand or contract monetary policy as the situation demands (with the moderately more hawkish concession from David Miles that inflation risks are to the topside); Demand for the DMO’s 50 year gilt auction was strong (as was the ten year benchmark); Total business investment in Q4 was dramatically revised lower but fears that this would lead to a downward revision to Q4 GDP were quashed when the Q4 data was revised to +0.3%q/q; after the very disappointing official retail sales data for January, the CBI retail sales volume balance rose to its highest level since May ’07 in February.
Elsewhere equities have been volatile but look set to close the week broadly unchanged, US data has been mixed with a notable sharp contraction in consumer confidence. In the Euro zone the woes have grown with the concern over Greece continuing to peak, the Wall Street Journal Europe ran a scathing critique of the prospects of Spain with its “unemployment rate of 19%, a deflating housing bubble, big debts and a gaping budget deficit”. The Spanish economy is almost twice as big as Greece, Portugal and Ireland combined and a further deterioration in sentiment towards Spain could be far more detrimental to the EUR than we have so far witnessed from the Greek impact.
One other significant point to make in relation to the Euro was the comment from Fed Chairman Bernanke that the “EU faces very serious challenges because of fiscal issues, single exchange rate” unusually expressing his concern for another jurisdiction.
In Japan overnight the data was positive with improvements in Industrial production, retail sales, housing and construction however deflation remains the biggest concern for the BoJ and the government as they struggle to ignite consumer demand.
GBP currently has the underlying fiscal concerns that are shared by its European and US counterparts, it also suffers the negative undertone of a potential hung parliament (a prospect brought closer by a Sunday Times poll suggesting the gap between conservatives and Labour has shrunk to just 6 points, the narrowest since Dec 08). Indeed the market sentiment towards GBP is overall very negative, however the large sell off in GBP over the last two days of the week can be largely attributed to a significant flow, in part driven by a gilt redemption.
It is not currently a popular view but GBP offers significant value at these levels for the medium term. As we move towards the election the uncertainty of the leadership and fiscal deficit reduction plan should lessen allowing the focus to return back towards relative value. On that front GBP has significant room for appreciation against EUR, CHF and JPY to name a few.
Next week sees Q4 GDP data from Australia, Switzerland, Canada and the Euro zone; Interest rate setting meetings from the RBA, BoE and ECB (with only the Australians likely to hike rates but focus will be on the ECB for further removal of liquidity measures, and the MPC for any QE related rhetoric) and finally unemployment reports from the US and Japan.
Have a great weekend