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Risk aversion still the dominant theme as a new week begins

Mon, Jul 13 2009, 10:42 GMT
by Saxo Bank Strategy Team

Saxo Bank

GBP especially suffers as weekend press has nothing positive to report

MAJOR HEADLINES – PREVIOUS SESSION

• US May Trade Balance out at -$26.0 bln vs. -$30.0 bln expected and -$29.2 bln prior

• US Jun Import Price Index out at +3.2% m/m vs. +2.0% expected

• US Jun Univ. of Michigan Sentiment Index out at 64.6 vs. 70.0 expected and 70.8 prior

• NZ May Retail Sales out at +0.8%m/m vs. +0.2% expected and +0.5% prior

• NZ May Retail sales ex-autos out at +1.6% m/m vs. +0.5% expected and revised flat prior

• JP May Final IP out at +5.7%m/m, -29.5% y/y vs. +5.9%/-29.5% prior

• JP May Final Capacity Utilization out at +8.0% m/m vs. +10.2% prior

• JP Jun Consumer Confidence out at 38.1 vs. 39.5 expected and 36.3 prior

THEMES TO WATCH – UPCOMING SESSION

• UK US Tres Sec Geithner meets PM Brown, Canc. Darling (N.A.)

• Swiss PPI (0715)

• EU ECB’s Trichet speaks (1030)

• CA BOC Business Outlook Survey (1430)

• CA BOC Loan Officer Survey (1430)

• US Monthly Budget Statement (1800)

Market Comments:

Weekend press did not have much positive news for the UK, and consequently the pound. UK’s Telegraph reported that the IMF has warned that the UK could not afford the vital stimulus required by the economy over the next 18 months due to the precarious state of its public finances. In its recent paper presented to a G20 meeting, it highlighted that every other G20 country apart from the UK and Argentina had been able to budget for temporary spending increases or tax cuts next year to pull their respective currencies out of recession. The news underlines prior warnings from S&P about the dire state ok UK finances and the risk of a possible ratings downgrade. Meanwhile the UK’s Times reported that Lloyds Banking Group is poised to write off as much as GBP13 bln on its loans to commercial property, businesses and mortgage holders. GBPUSD broke through recent lows early in the Asian session and looks set to extend its fall.

Also in the Telegraph, columnist Ambrose Evans-Pritchard’s piece featured further bearishness on Europe as he lambasted the ECB, expressing concerns that its actions in refusing to join the “club” of quantitative easing central banks could end in pushing the weakest states under its auspices into a debt-compound spiral that could end in bond crises and/or the disintegration of the EU. EUR started the Asian session with a mild bid tone but soon gave up the gains after struggling to break through the key 1.40 mark.

Japanese politics hit the headlines over the weekend after metropolitan elections results saw PM Aso’s LDP party lose its majority in the Tokyo assembly to the opposition DPJ party for the first time in 44 years. The result is seen as a good barometer for the pending general election and has stirred up a host of calls for immediate dissolution of parliament, possibly as early as tomorrow, as Aso faces increased pressure to resign from both within and outside the party. An early dissolution is regarded as being positive for markets as it removes the uncertainty early on. While the JPY is not seen as the most politically-influenced currency, and delay, and extreme opposition rhetoric (recall the DPJ spoke recently, and repeated at the weekend, about diversifying Japan’s FX reserves away from the dollar medium-term), may take some of the shine off JPY’s recent sparkle. Latest update: Reuters reports LDP has decided on an August 30 election.

As we enter another week, tomorrow is beginning to shape up as the major event risk on the horizon. Goldman Sachs will be the first of a number of financial institutions reporting Q2 numbers while economic data features retail sales numbers for June. A NY Times article gave risk sentiment a lift during the Asian morning as it suggested Goldman’s could produce astounding profits from its Q2 trading. On the retail sales data, markets are hoping that constructive rebounds in PMI readings of late will transfer into end-user demand. However, given the fragile nature of recent US consumer confidence data, any improvement will likely be marginal. Recent polls suggest a 0.4% increase following last month’s +0.5% with the data series ex-autos remaining steady at +0.5%.

On this theme, the latest Bloomberg poll showed economists upgrading their US growth estimates for the second half of the year and 2010 as a revival in consumer spending signals an end to the recession, the report suggests. The poll suggests growth will average 1.5% for the July-December period compared with last month’s 1.2% forecast. However, the same report highlights that unemployment will likely exceed 10% early next year and average 9.8% for 2010.

Published on  Mon, Jul 13 2009, 10:45 GMT