Dollar
There will be expectations of solid US growth in the short-term with particular optimism surrounding the manufacturing sector. There will still be some concerns over consumer spending, especially if the sequester does take effect, but the US economy is still set to out-perform over the next few months. The Federal Reserve will maintain its short-term commitment to bond purchases, but there will be some pressure for the bank to signal an eventual tightening. In international terms, the US dollar should still be able to out-perform, especially given vulnerability in the eurozone.
The dollar was able to maintain a robust tone during the week with further net gains on a trade-weighted basis, but it was unable to break 1.30 against the euro.
The US data was generally solid with an increase in consumer confidence to 69.6 for February from 58.4 previously. There was also an increase in new home sales while the Richmond Fed index returned to positive territory. The data reinforced expectations that the US economy would out-perform over the next few months.
The headline US durable goods data was weaker than expected with a 5.2% decline, but there was a significant core increase which provided some underlying reassurance.
The headline US GDP data was revised to 0.1% from -0.1% previously. As expected, there was an improved trade performance with the deficit at a three-year low, but there was also a lower build-up of inventories which could underpin future growth.
The other data was stronger than expected with jobless claims falling to 344,000 in the latest week from a revised 366,000 previously. There was also a stronger than expected Chicago PMI reading at 56.8 from 55.6.
Fed chairman Ben Bernanke stated that the benefits of quantitative easing out-weighed the costs at least for now. He remained concerned surrounding the labour-market, but was generally more optimistic surrounding the economic outlook which curbed any immediate dollar selling. There were still expectations that bond purchases would continue in the short-term, but could be tapered later in 2013.
Euro
There will be expectations that the German economy will continue to register firm growth. There will still be concerns surrounding the peripheral outlook as a whole with increasing pressure for austerity measures to be reversed. The Italian election has triggered fresh unease surrounding the prospects for structural reform and also increased pressure for a reversal in austerity measures. There will also be additional pressure on the European Central Bank to relax monetary policy further to help underpin demand conditions and there will be political pressure for a weaker euro, especially from France.
The euro lost ground during the week as a whole and for February as enthusiasm for the currency faded on renewed political and economic concerns.
Initial exit polls from the Italian election suggested a centre-left majority was likely in the Lower House and Senate which provided immediate euro support, but the currency was quickly subjected to fresh selling pressure on later projections which suggested that Berlusconi’s centre-right coalition could win the Senate.
The provisional results confirmed a Lower House victory for Pierluigi Bersani’s centre-left coalition, although the margin of victory was extremely narrow at less than 0.5%. Similarly, the Senate vote was very close with Berlusconi’s centre-right party the largest party. With Beppe Grilli’s five-star movement poling over 25%, no bloc will have a Senate majority. This outcome increased fears over political deadlock and a lack of support for economic reform policies.
In turn, there were fears that wider eurozone stresses would intensify once again as support for austerity policies continues to erode rapidly. There were market concerns that support for austerity programmes would erode rapidly and create serious friction with Germany and the EU Commission.
There were also important concerns that Italy would now be much more vulnerable in the event of a market attack against the bond market, especially as it would be extremely difficult for the country to meet conditions attached to the ECB’s OMT (Outright Monetary Transactions) programme. On a wider perspective, there were concerns surrounding the wider political acceptance of austerity measures and demands for policy changes.
Compared with January, there was a significant increase in yields at the latest Italian Treasury bond auction. There was relief that yields did not increase further and there was also some reassurance over the bid/cover ratios. Initial relief was tempered by a strong suspicion that Italian banks had been the main buyers, especially after data from January confirmed that local banks had been strong buyers in domestic auctions.
The eurozone inflation rate was confirmed at 2.0% for January while there was a lower than expected reading of core inflation at 1.3%. The decline in inflation will maintain expectations that the ECB could shift to a more accommodative policy at next week’s council meeting.
Range for previous week: $1.2965–$1.3318
Range for this week: $1.2850–$1.3150
Sterling
Underlying confidence in the economy will remain extremely fragile in the short-term with fears that growth will remain weak. The loss of AAA credit rating will complicate government policies and markets will be expecting a generally defensive budget. Bank of England policies will also remain an extremely important focus and there will be strong expectations that the bank will pursue more aggressive policies to help underpin the economy. Sterling could gain some support from a fresh deterioration in eurozone sentiment and volatility is likely to remain high, especially if eurozone stresses increase.
Sterling was subjected to renewed selling pressure early in the week, but there was a more stable tone which helped the currency resist further losses later in the week.
Just ahead of the US close on Friday, Moody’s announced that it was cutting the UK credit rating from AAA to Aa1 due to the persistently weak growth outlook and unease surrounding debt levels. There were widespread expectations that the AAA rating would be lost within the next few weeks, but Sterling was still subjected to significant selling pressure. There will also be important political stresses as it puts the Chancellor under intense pressure ahead of next month’s budget.
Bank of England members remained generally cautious over the economic outlook and insisted that there was room for further quantitative easing if required to support demand. Deputy governor Paul Tucker commented that it was worth considering negative interest rates as a radical measure to help support the economy. Charles Bean stated that he did not want negative interest rates and that the idea had only been floated as an idea rather than being a serious policy proposal.
Range for previous week: $1.4984–$1.5219
Range for this week: $1.4980–$1.5100
Yen
The appointment of Kuroda as the next Bank of Japan Governor will be extremely important for the medium-term yen prospects, especially given his reputation for favouring more aggressive monetary policies. There will certainly be pressure for additional monetary stimulus to combat deflation. The central bank is still likely to cautious over more controversial policies such as foreign bond buying. The yen could also gain some degree of support if confidence in the global economy deteriorates in the short-term.
Buying pressure on the yen intensified dramatically late in the US session on Monday with the dollar briefly declining to below 91 as the Euro retreated to lows below 119 from a peak above 125 just a few hours earlier and registering the sharpest one-day decline since May 2010.
The yen was unable to sustain the gains as underlying yen sentiment remained weak.
As expected, the government confirmed its appointment of Asian Development Bank head Haruhiko Kuroda as the next Bank of Japan Governor. Iwata and Hiroshi were nominated as deputy Governors. There will be expectations of an aggressive monetary policy to combat deflation, although there will be reduced speculation that the Bank of Japan will buy overseas bonds and the appointments were in line with expectations.
The economic data was generally yen negative with a sharp decline in capital spending for the fourth quarter. The inflation readings were in line with expectations with a national core rate of -0.2% for January, illustrating the difficulties in combating deflationary pressure.
Range for previous week: ¥90.94–¥93.58
Range for this week: ¥92.70–¥94.80
Italian PD (Democratic Party) leader Pierluigi Bersani speaks during a news conference in Rome last Tuesday. The outcome the general election has increased fears over political deadlock in Italy and a lack of support for economic reform policies.
Saudi shares rise on economic outlook
Bloomberg
Riyadh/London
S |
audi Arabia’s benchmark stock index rose the most in two weeks yesterday, led by Etihad Etisalat Co, known as Mobily, after better-than-estimated data on US consumer confidence and manufacturing yesterday.
Mobily, the second-largest telecommunications operator in Saudi Arabia, climbed to the highest level in more than six years. National Industrialisation, the petrochemicals maker known as Tasnee, jumped the most in two months.
The Tadawul All Share Index gained for a second day, adding 0.3% to 7,016.61 at the 3.30pm close in Riyadh. The gauge had the biggest jump since February 16 on a closing basis as 69 shares advanced, 49 declined and 41 were unchanged.
“Gains in the market today (Saturday) are still modest and below expectations and attributed mainly to telecom, petrochemical and banking sectors for various reasons including the positive sentiment in international capital markets during last week,” said Mohammed al-Omran, a financial analyst and president of the Gulf Center for Financial Consultancy in Riyadh in an e-mailed response to questions.
Mobily, gained 1.3% to 75.5 riyals and Tasnee increased 1.4% to 29.1 riyals.
Separately, a London judge ruled on Friday that a Credit Suisse Group unit wasn’t negligent when it advised a Saudi Arabian investor who lost $31mn on structured notes after failing to make a margin call.
Basma al-Sulaiman’s decision not to cover a $10mn margin call from Credit Suisse following the collapse of Lehman Brothers Holdings in 2008 was “irrational as to be incomprehensible,” Judge Jeremy Cooke said in his written ruling on the dispute handed down on Friday.