The reports that Tony Blair’s book point to a rift between him and Gordon Brown and that Princess Diana was manipulative only confirm one thing; there is nothing new in the book. I think I’ll stick to my le Carré and Grisham novels where the fiction is more realistic than the interminable stream of “non-fiction” political memoirs.
As for the markets, well last week ended with economic growth data from the UK and US. The UK numbers were roughly in line with forecasts but the US data showed a reduction from the 1st estimate of Gross Domestic Product growth although the final figure was well above markets expectations and that was enough to keep the demand up for the US currency. As you might expect though, all it yielded was a frantic calculation by traders and investors over whether the Q3 data will be an improvement or a disappointment and most seem to think it will disappoint. The minutes from the last Federal Reserve Open Market Committee were published yesterday evening and they offered some insight into the thoughts of the policy makers. The whole report is probably best summed up by this comment “monthly data suggested that the pace of recovery remained sluggish going into the third quarter". The Fed are clearly worried that we may see more slow growth but they were optimistic that this would be followed by a pickup in 2011. Crucially, there appeared little concern over a 2nd recession which is a real plus point. The US Dollar had a small scale rally overnight.
The UK number was revised higher by just 0.1 percent which was in line with most forecasts and showed growth in business inventories; a relatively finite factor and one which will not be reflected in the Q3 numbers. Traders and investors are also very wary of the fact that government spending cuts will start to feature in the Q3 figures as well so Sterling failed to make further headway. I guess it is not surprising that the Pound, which has tested the top of its trading ranges against the Euro, Australasian Dollars and Canadian Dollar, should decline before breaking any higher. Although UK traders were not at their desks, there was a smattering of UK data and it was very mixed; a fall in house prices, a rise in consumer confidence and a report from the British Chambers of Commerce that suggested economic growth would average out at roughly 2 percent over the next few years and that UK interest rates would stay low for a considerable time. Compared to a lot of recent forecasts, that is pretty encouraging.
For its part, the Australian Dollar gained a little strength overnight after positive retail sales data was released over the weekend and after it was announced overnight that Australia’s economy grew at its fastest pace in three years in Q2. The strength of Australia’s economy will come as sweet music to anyone migrating to Australia but the increased likelihood of higher interest rates will most likely make the Aussie Dollar more expensive and that is bad news for migrants and those importing goods from Australia.
The New Zealand Dollar which generally tracks the Australian Dollar had a bit of a scare when Government backed Canterbury Finance called in the receivers. This 85 year old bank is the first in New Zealand to fail as a result of the financial crisis and it took two years of global slowdown for the effects to be felt. Nevertheless, it has caused inevitable concern over whether there may be other problems lurking in the NZ financial system and the NZ Dollar could come under a bit of pressure as this story unfolds.
The Euro is a tad weaker against the US Dollar but failed to make any significant headway against the Pound. Traders are looking ahead to Thursday’s European Central Bank interest rate decision and, although no one is forecasting any change in the interest rate or the level of fiscal stimulus, it is apparent that the Eurozone is running at two separate speeds. The German and French economies are in a different league to the Mediterranean countries and some of the more recent members of the Euro club; the ECB has a pretty complex task on its hands to balance efforts to stimulate growth in the weaker economies whilst not allowing overheating in Germany and France and maintaining strength and confidence in the EU banking system which is at the heart of the problem. It’s a bit like juggling 16 balls whilst putting on eye makeup and changing clothes behind a beach towel...all at the same time. Bonne chance Monsieur Trichet.
The Canadian Dollar is likely to be fairly inactive until we get the Canadian economic growth data today and the strength of the US economy and relatively well performing commodities will add weight to the case for a stronger Canadian Dollar. The forecasts for GDP growth are pretty positive so Canadian Dollar buyers may want to protect themselves ahead of the numbers.
This week brings a lot of inflation and growth related data from around the world so it should be another lively one; it also sees a return to full trading desks as the schools go back and dads and mums return from their holidays. Higher volume and heightened nervousness will tend to boost volatility so let’s be careful out there.
One of the major movers in the market is the Japanese Yen which the Bank of Japan are attempting to weaken through a combination of an extra 10 trillion Yen being thrown at the market for extra liquidity and BOJ members talking about how uncertain everything is. The extra cash is a 50% increase on the previous total of fiscal stimulus and a very significant move indeed. It begs the question over whether the US, UK and EU will all be forced to follow suit in the months ahead - albeit to perhaps a lesser extent. That kind of activity; specifically designed to weaken the Yen and restore some of the advantage that Japan’s exporters have enjoyed, is precisely what the US and EU have been berating the Chinese authorities for during the last few decades. The silence over the Japanese move has been deafening.
I’ve just read this back and it is a bit of a leap and dive around the globe but the markets are all over the place both geographically and figuratively speaking so it is hard to leave anything out. I will leave you though with some research carried out by a bunch of long haired whipper-snapper hippies in Ohio State University. These youngsters who should be doing something more useful with their time and were probably on drugs or something seem to think that older people make disparaging remarks about the young in order to boost their own self esteem. Poppycock; we didn’t waste our time on daft surveys like that in my day.