Market Updates(17-Nov-2011)

It’s a familiar cycle playing out once again in the financial markets. Last week the doom and gloom appeared to subside with the installation of a new Prime Minister in Greece and the promise of imminent political change in Italy. This week, Italy has also resolved its political limbo and installed Mario Monti at the head of a new technocratic government; yet we are already beginning to see the murmurs of crisis creep back into the fray. The ominous sign of bond market yields climbing heralds a return of focus on the underlying Eurozone problems, with the yield spread between French and German bonds reaching an unsavoury landmark of 200bps today. It is perhaps baffling that savvy investors can be prone to such capricious shifts in mood about the state of the Eurozone, when in actual fact very little about the underlying situation has really changed. Superficial changes in leadership within the EU should never be considered a cure-all for problems of the magnitude of the current debt crisis. After all, some 1.9 trillion euros of debt sits on Italy’s accounts alone, and no new leader is likely to be able to produce a quick and painless solution to that. Outside of the Eurozone, it has been a week heavy in UK data releases; however there have been few silver linings delivered until this morning. UK retail sales for October were much better than expected at a robust 0.6% MoM, 0.9% YoY, compared to consensus estimates looking for a contraction of -0.2% MoM, -0.1% YoY. GBPUSD has managed to enjoy a brief bounce in the aftermath of the release, but the overall backdrop in UK fundamentals remains depressing. In spite of the uncomfortably high UK CPI print earlier in the week (5.0% YoY), yesterday’s release of the BoE quarterly inflation report actually managed to counter inflation concerns and instead re-emphasize the weak growth side of the story. Not only did the report downgrade growth forecasts to 1% in 2012 (down from 2% previously), but inflation forecasts were also adjusted lower. In two years’ time, CPI is projected to hit 1.2% before rising modestly to 1.5% in 2014. Given the exceptionally dovish tone to the publication, Mervyn King was quizzed at the ensuing press conference about why the MPC did not act at the last monetary policy meeting to increase stimulus further. He responded that now was not the time for the MPC to “fine-tune” policy, and that given the massive overshoot in CPI at present (some 3% higher than the MPC target rate of 2% YoY), it would be prudent to see if inflation did actually come down naturally as per their forecasts before taking any next steps. If prevailing MPC sentiment stays the same over the next few months it seems highly likely that the central bank opts to increase the asset purchase target again early next year. At the October meeting, the BoE committed to some 75 billion pounds of asset purchases which would be carried out over the following four months, a scenario which would point to February as the point where another shot of quantitative easing might be dialled up. Further sterling-negative news came in the shape of the ILO’s unemployment rate for September which jumped to 8.3% from 8.1% the month prior (markets were expecting a smaller increase to 8.2%). There was however a positive side to the story, as the claimant count rate remained stable at 5.0% in October, in contrast to the market’s expectations of a rise to 5.1%.


By
M.Zohaib Gadit
Forex Trading Consultant